And It’s Not Hard To See Why
Startups lie. They lie a lot. In the past few weeks I’ve read articles discussing Rocket AI, Magic Leap, and the ongoing insanity that is Theranos. The only thing these companies have in common is that they have lied to the public and/or investors. In the case of Theranos and Magic Leap, they took billions of dollars without a real product. In the case of Rocket AI, the creators faked a launch to prove a point — lying works in Silicon Valley.
Before you launch your company, there is no data about success or failure. And if you’ve created something new and monumental, there’s also no data about the true value of the company. If valuing the total opportunity is difficult because the company is so unique, and there’s no data about your likelihood to succeed, all you have is a story. It’s a tale to tell would-be investors, friends, and potential clients about your world changing product that they need in their lives. The lies in startups tend to start from this core concept — a couple of excited founders have a big idea, and they sell the hell out of that vision, often convincing people to give them millions of dollars without ever proving that they can accomplish what they claim.
It’s much easier to sell the huge potential upside of your company when said company is tackling something HUUUGE (said in Trump voice). Theranos wanted to revolutionize the billions of dollars in medical spending dedicated to extracting and analyzing blood samples. Magic Leap promised we would put on a pair of glasses and be transported into an alternate reality where beautiful creations and experiences were painted on top of our own world. Both of these narratives are aspirational and exciting. Hell — I WANT those products to exist. I WANT to invest in those companies. But here’s the rub — neither company could pull it off. For the sake of this article, I don’t care whether they were malicious in the lies. In fact, I think it’s more interesting if they weren’t. After all, that’s the energy of all startup founders — to believe they can achieve something that others deem impossible.
If we assume they didn’t purposefully lie, let’s dig in. You tell investors a story about what you can do. They give you a bunch of money. But these investors need to see progress in order to give you any more money, so you develop partially functioning products. You take your whole team and dedicate them to lifting up the narrative that has been spun, instead of focusing on what you could actually build. You spend millions of dollars trying to remember every lie you ever told and attempting to get closer to the reality you lied about. You start to run out of money and you need more cash, you spend what little money you have left to spin up an even more incredible story, or partially functioning product that could never go to market, and you take that on another dog and pony show for investors. They give you more money and now you’re 2.5 years and $55 million dollars down a path that could never lead to a successful business.
I remember hearing a description of the lies told during the Enron debacle. It was said that there weren’t any huge lies told outright, but rather many people telling a bunch of small lies. There were many employees being complicit about hidden accounting changes, and everyone looked the other way as others bent the truth. Each lie lifted up the company, made the employees stock worth more, and guaranteed that the individuals at Enron kept their jobs. But the problem is that lies stack. If you add a lie to another lie, slowly you create a huge monstrosity of untruth. In the case of Theranos that meant a non-functional blood testing apparatus that was actually deployed for real world use. That actually led to incorrect diagnoses, and though it didn’t — could have killed someone.
If a startup has a huge idea, that startup often needs lots of capital to turn the idea into a reality. The founders of these startups are incentivized to claim that they’re creating the next big thing, because if they aren’t — why would anyone give them millions of dollars? This incentive is even larger when the company the founders want to create is so massively complex and arguably world changing that no one on earth knows how to make it a reality. You have to spin a yarn that you’re the one that was specifically built to create this reality that has never existed before. The tricky thing is that the best storytellers aren’t often the best product creators. And as long as storytellers can get venture capital, they’re going to tell REALLY elaborate tales to get the money they need to go after the vision they may not be able to pull off.
But let’s consider the venture capitalist’s side of this story. They are also incentivized — incentivized to believe the big vision. The reason for this is economics. Venture funds with hundreds of millions or even billions of dollars under management have a financial duty to return that money to the LPs that put it into their fund. For a fund of that size to be deemed successful, you have to have completely outlandish exits for at least one company within your portfolio. You need a Facebook, or a Google, or half a dozen YouTubes to be seen as a success. All of these companies looked unlikely if not impossible at the outset. So if the only way investors see sizable returns is to bet on things that seem impossible, you’ve created a market where founders are incentivized to tell stories that seem impossible and make promises that are so outsized to their current station in life, it’s going to be incredibly hard to tell whether they’re true or not.
Founders are incentivized to lie about their abilities, and investors are incentivized to believe them…
Ending this article feels weird. I argued the reasons behind lying, but didn’t come up with any solutions. I’m not sure there are any. I think the reality is that given that both sides of the market have economic reasons to participate in a lying culture, I’m not positive we’ll ever see any of this change. The investors can search for signals that mean a founder isn’t lying, or a product is more likely to succeed — but they’ve been doing that forever. It seems impossible to pinpoint every lie in startup culture not only because it’s omnipresent, but because sometimes the truly incredible companies actually look the most like lies. And, no one wants to miss out on the next Facebook, they’ll just hope they miss out on the next Theranos.
As always you can reach me at ryan@zeroslant.com
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Ryan Sheffer is Founder/CEO of Zero Slant, an AI-based automated creative agency. He is on a quest to figure out how to humanize bots without the noise of bias.