Many entrepreneurs think that fundraising is a standard sales process and polishing a little bit on the story is nothing more than totally justifiable self-marketing. It’s not. “Selling” your company to an investor is different, because the VC (or angel) will relocate to a spot behind your back after the deal has been closed. It would be as if all of a sudden your car dealer decided that they were going to be sharing the car they just sold you – with you. Pretty different game, huh? Here’re a couple of reasons why you shouldn’t lie to an investor:
The Magic Six
Investors work with people. Lots of them. During their daily practice of engaging with many people they become more and more skillful in analyzing human nature out of just a handful of almost invisible and definitely unconscious signs. In other words, investors have a very well developed bullshit detector and you had to lie extremely professionally in order not get caught. Chances are, you don’t lie that well. (No offense.)
Even if you lie like a trained special agent, there’s the due diligence process before most of the investments done by lawyers and analysts and it’s very likely you’re going to be caught there, because you’ll have to show them numbers and the nature of numbers is that they don’t lie – except in the hands of a statistician. Needless to say, it’s an immediate show-stopper for any investment if you get caught.
Investors think differently than entrepreneurs often expect them to think. Those who are former entrepreneurs especially know there’s always some shit in one corner or another. Surprisingly, skilled investors aren’t afraid of shit. They’ve been there, done that, dealt with tons of turd. They afraid of not knowing about where the shit is hiding and when it will jump right at their face out of nothing.
Especially in the early stages of a startup, investors usually make their bets on the jockey and not on the horse. We invest mostly because of and into people, not into companies. Giving up your advantage of honesty in exchange for a better outlook of your startup will immensely decrease your chances getting funded. It would be like you cared more about the clarity of the plate under a set of rotten apples on your fruit stand in the market then the apples themselves – good luck and have fun selling them.
Even if you polish the turd professionally, passing all the tests, and get funded, at the end of the day, the investor in front of you will relocate into a position behind you. One of the few helping you. One you should trust and rely on. Do you really want to build this very important relationship on a landmine of lies? Do you want someone on board to be extremely disappointed? Think it over: focusing only on your short-term interest of getting the money can hurt your long-term ones of building a great company pretty badly.
Startups and venture capital is a people game. And people keep moving on their career path, very likely coming across a few times in your life. If you once get caught on waxing reality, one door in your life is closed forever while you could get use of it a few more times some years later.
I met a talented young serial entrepreneur few weeks before who pitched a great product. Since all the Partners of TT showed interest investing, I told him we’d send a term sheet. A day later he sent an email explaining why we shouldn’t: he described a patent related legal warfare between the two market leaders, claiming that – depending on the end result of the lawsuit – their entire solution should be subject of another legal action. He knew every bit of the story.
And what did this mean to us, investors? First, it meant the guy is honest on a supreme level, and second, he knows his market back and forth. Not surprisingly, we wanted him on board twice as much. We closed the deal in three weeks.
The lawsuit? Screw that, I know a dozen solutions to situations like this. I was properly introduced to the shit, we carefully examined it and came to a conclusion that it’s only a slow-moving-non-jumping type of shit. It’s a minor challenge solving it – when there’s a will, there’s a way.
Don’t lie to an investor. It hurts your interests in so many ways that it simply is never worth it. Even if telling the truth result in an investor passing on the deal, your courage and straight-forward attitude pays off on the long run. Honest, laborious people are remembered and valued. You can come back later and will always be welcomed.