Lying in fundraising: does it matter?

I just discovered that someone I know, and had drinks with multiple times, has been charged by the Ontario Securities Commission with fraud, and will be sentenced later this month.

He was a fund manager. And I also think of him as an entrepreneur, because he was launching his own fund. His story holds a strong lesson for all entrepreneurs.

The first lie is the problem

If you read the newspaper summary of the story, you see a pattern of escalating lies, to support his fundraising efforts.

It starts with two little lies: one about the size of his total fund ($15M vs. $4M under management), the other about his fund’s performance. Then he takes funds out of the company to cover his expenses, beyond what his management agreement says, very possibly intending to pay them back later when the fund has grown. When things go badly for a few months, he layers on more lies about the fund’s performance. When pushed by one investor for audited financials to prove these results, he then produces falsified audit statements from a fictitious auditor. And he gets caught.

It’s easy to look at this and think ‘what a fraudster’. Maybe he is. I don’t know him well enough to be certain.

And I know I have felt the same pressure to present myself well to investors when fundraising. To make that sales contract that you have spent months on, that is not yet signed, sound more certain.

Maybe you should even include it in your revenues now, to close this round of funding?

That’s where the lies start. The first active lie – as opposed to optimistic exaggeration. And once you’ve made the first lie, it gets hard to stop. When the contract falls through, if you admit it, you will get caught in the lie. Then the temptation starts to cover it up, since you don’t want to be caught in a lie, and you still hope to make things right through good business performance. And the next lie seems forced upon you, and then the next lie, and all of a sudden you’re falsifying audit statements and walking away in handcuffs.

The answer is simple: don’t make that first lie. If your company will fail if you don’t get the investment, and the investor wants to hear that the big contract is signed before she invests, too bad. Find another way to get the money, or to make the business work … or just walk away.

In my past business, investors lost more than the $2M lost by the fund manager’s clients. He got led off in handcuffs. I’m on to my next business. Why? Because I told the truth. I lost the money honestly.

Transparency hurts … and helps

I got a good lesson in transparency early on in Skymeter. To start with, I reported to all my investors in person, through meetings and phonecalls. While I never actively lied, I would be optimistic about our future and would share the good news, and tend to downplay or omit the bad.

This was fine for a few months. And then there was the inevitable disappointment, when things I thought were almost certain didn’t happen.

Luckily, around the same time I started to send out a monthly newsletter to all of my investors. The biggest lesson I got was reading my own newsletters from four or six months previous. With the benefit of history I could see what I had thought would happen, and what actually did happen. It was difficult to be transparent. It was embarrassing – just like admitting that first lie would be embarrassing – to see how positive I had been about customers who still weren’t customers six months or a year later. It was really embarrassing to see how I had presented things that now everyone could see hadn’t come to pass.

And that pain taught me the value of truthfulness. My tone changed. I shared the good and the bad. And I went on to raise multiple rounds of financing, and we brought the company to the brink of success (before infighting, greed – and being the victim of fraud – destroyed it).

The biggest way you can stop yourself from lying is to start being transparent. Tell people what’s up on a monthly basis (use something like IncMind). The more you tell them, the harder it is to keep lies going, and the more pressure you have to stay honest. It may hurt, and in the long term it will help your business, you, and all your relationships.

P.S. And as an investor, if your investee refuses transparency, or wants to brief you one-on-one rather than using a platform like IncMind, remember this post …