A confidence game‍

The most important thing for a new business is to generate and maintain investor (and customer) confidence. Take out the confidence, the money and prospects dry up. To create interest and grab attention, entrepreneurs learn early-on to generate an air of unbridled optimism, push their vision of the company’s value assertively, hype things up, and get ready for the next round of funding.

Not surprisingly, to maintain the hype, some misrepresent their achievements to keep up with the high expectations they have themselves created. This is where they cross the line from the real world to one built on deceit and delusion.

‍Fake it till you make it

‍Start-ups pursue ambitious goals. They don’t know if they will ever be able to deliver on their plans or accomplish what they set out to do. This is fine. Taking risks is at the heart of every new venture. But that does not mean a start-up should engage in wilful misrepresentation. It is acceptable to aim high but it is not acceptable to mislead.

The culture of avoiding the truth or pursuing a policy of: “fake it till you make it” - remains prevalent among ambitious entrepreneurs. It is tolerated and even encouraged by investors. But some entrepreneurs take it too far.

The “fakers”, who engage in calculated deceit, often simply withhold the truth rather than lie outright arguing for the need for secrecy for competitive reasons even from investors. This further perpetuates the falsehood while at the same time gives the non-existent or over-hyped product, a further boost by enhancing the aura of mystery around it. Three case studies illustrate the point.

‍The poster child: Theranos

‍The most talked about example in the last few years, the poster child of start-up deceit, remained shrouded in secrecy for years. Theranos, a company said to have invented ground breaking blood testing technology claimed its small testing machines could complete several medical tests from a single drop of blood drawn from a finger prick. It promised to empower ordinary people and put them in control of their own health or as the company’s CEO put it, “the individual is the answer to the challenge of healthcare.

”Over a decade its youthful CEO, Elizabeth Holmes, given to wearing only black, Steve Jobs style, and kept up the confidence of everyone. At the peak of its hype, the company was valued at a whopping $9 billion. It had over a thousand staff and was buring $20 million a month.

In late 2015, the Wall Street journal began investigating the company and revealed that only a small minority of the tests carried out by the company were conducted on its own Edison machines and even those were mostly inaccurate. In around mid 2016, Walgreens, the large drug store chain in the US ended its agreement discontinuing the 40 Theranos Wellness Centres in its stores in Arizona. Since then Walgreens has sued the company for $140 million. Holmes has been barred from running a lab for 2 years and Theranos has closed the company’s California lab.

The company’s focus now is on developing and marketing a table-top blood-testing product called the mini lab as it continues to survive on dwindling funds. Even if Theranos can battle the growing “army of lawsuits”, TechCrunch thinks the product is nothing new, let alone revolutionary. It is hardly likely to save the company from inevitable extinction.

‍Too good to be true: Lily Robotics

‍In January this year, Lily Inc. – the developer of a quadcopter drone based camera – which took the selfie craze to a whole new level, decided to shut down operations finally revealing that it had been accepting pre-orders for a product that did not exist.

In a promotional video in 2015, the company showed off a proto-type. A drone mounted camera, launched by hand, following its owner down a ski slope shooting high quality video, switching direction on command to shoot from the front, or take in a 360-degree view, and finally returning to the outstretched hand that launched it. It identified its owner from a wrist worn gadget. The product was so intriguing that the Wall Street Journal put it on its front page in late December 2015 as part of “tech that will change your life in 2016”.

Sadly, the whole thing was not real. The promised technology just wasn’t there. In any case, the core technology allowing a drone being tossed into the air, stabilise itself, and follow a programed path is not unique to Lily. It is now being developed and featured by other drone companies. Lily’s promotional video showed how seamlessly and effortlessly the drone camera worked. But it was shot using a drone from DJI, a competitor, with a GoPro camera mounted on it. Worse, the company had already accepted advance orders to the tune of over $25 million from 60,000 customers.

Investors are not stupid and are not easily duped by someone pedalling unachievable dreams but they are under pressure and there is little time to do a detailed due diligence. It is still odd though that none of the investors asked for a real-life demonstration of what they had seen in the company’s promotional video. In emails released in relation to a lawsuit, the company’s CEO wonders: “I am worried that a lens geek could study our images up close and detect the unique GoPro lens footprint. But I am just speculating here: I don’t know much about lenses but I think we should be extremely careful if we decide to lie publicly.

”A suit filed on behalf of the people of California accuses the company of intentionally misleading its customers with the promotional “jaw dropping” video which was faked.

‍Pure Mayhem - Powa

‍In payments and financial services, there was the supernova of a high-flier start-up in London last year that grabbed headlines. Powa, a company that was at one time valued at $2.7 billion claimed to have major multi-national clients for its payment platform and products and was opening up sales offices across the globe to keep up with a non-existent demand for its products.

The alleged deceit was phenomenal. The company led by its colourful CEO was plainly misleading everyone by announcing confirmed contracts with customers that had not been signed. The Financial Times, followed the story over several months and published several articles which demonstrated that creating hype and overselling the company was an organised, deliberate strategy and one in which, at one point, even investment bankers were involved. It published a leaked document developed in September 2015 that put “a preliminary enterprise value of $16 billion to $18 billion as a base case” on the company describing it as the “tech investment of the decade” with a “clear path to $50 billion””. Elsewhere the document described Powa’s strengths in terms that any business school professor would have been proud of. The company was described as having “clean sheet innovation”, offering “competitive checkmate”, and “next generation incumbency”. Powa came down in flames when it ran out of cash and its investors pulled the plug.

‍Tell the truth

‍There is no easy way forward. Start-ups can set their ambitions high even if they don’t have prototypes and are hoping to develop one. Start-ups can over-sell their dreams but what they have at any moment cannot be hyped beyond reality.

Entrepreneurs and investors should know there is not a fine line between hype and deceit. The line is well marked and clear. Dreams can fly high but achievements must be tied close to the ground in down-to-earth reality.