At the time of this writing, WeWork is setting a new standard for creative accounting with measures like their “community adjusted EBITDA.” Some of you may remember that Datapoint in San Antonio set the original standard in the early 80’s by booking as sales goods moved from one end of their shipping warehouse to another. Since everyone in this industry is generally pretty smart, there’s no limit to the clever twists on GAAP that can be devised. 

I’m now seeing in my own deal flow some decks that are creating phantom revenues and/or phantom prior investments to pump up their stories. My mission is not due diligence to the point of making an investment; I’m merely trying to ascertain if these ventures would be good clients for the law firm with whom I work and would be worthy recommendations to my A-list investor connections. I’m neither a lawyer nor accountant, and if I can spot tall tales in the midst of cursory reads at high speed, these deck-writers need to dream up better disguises for their exaggerations.

There are many practical reasons to be scrupulously honest in your presentations to all your stakeholders, past, present, and potential. First, you will eventually get busted. Second, intentional misstatements to prospective investors rise to the level of fraud. When you do get busted, you will become familiar with the unpleasant term “rescission” and perhaps find yourself personally at risk for financial obligations. Third, people have long memories of such transgressions; you are risking permanently your ability to play in the startup world.

Honesty is also a form of insurance against ill will. If you’ve been thorough in your listing of risk factors, you’ve operated the business carefully and correctly to the best of your ability, you’ve kept all of your constituencies informed all along the way, and you’ve personally shared in the downs as well as the ups, then when the venture croaks for whatever reason, that’s just the roll of the dice. Your product may have been too early, or too late. You may have misjudged the selling costs. You may have been crushed by a competitor with much greater resources. There’s always adventure in startup ventures, and you know well the failure rate is high. You get to keep playing if you’ve earned trust by your management style and your openness.

Staying ahead of the news cycle is an excellent practice. You never want people who have a tangible interest in your success to hear bad news anywhere except first from you. There is no localized fourth estate reporting on startups. All the news is positive. You don’t have to worry about an investigative reporter chasing you around; those folks only want the big, nasty stories from larger public companies. Your business news is covered by online media that will gladly accept happy announcements from you and never do any fact checking. There’s no equivalent to Maureen Dowd’s hyperventilating in the NYT about every action by our current POTUS. The only people who really care about your progress are the ones who gave you $1 with the hope of getting $10 in return, and maybe your family. News travels more slowly, but it eventually does travel, particularly if you keep going back to the well for more money from existing investors.

Let’s shift gears a moment and talk about honest forecasting. Everyone understands that all startups have hockey stick financial models that are created from assumptions piled on top of other assumptions. I always advise entrepreneurs to work backwards from their 5th year projection to see what valuations in early rounds gives their investors venture returns while leaving a significant stake for the management team. The financial model is a validation exercise. If it shows that the numbers work only if you get 100% share in your target market, or if your selling costs or pricing models are not consistent with the norms of your industry, or if you only need $500K in capital to create a Unicorn, you might need to revisit your slide rule and rethink your basic business idea. This is more an issue of delusion than one of right or wrong. I continue to see plans that have inputs that are out of bounds and have already been proven by others to be infeasible. The “suspension of disbelief” is a motion picture term, but it has crept into many a startup financial model. 

As an entrepreneur you can easily fool yourself into believing the fruits of your labor make total sense and will fulfill your dreams of success. That is a phenomenon I have seen many hundreds of times. The only way to avoid that is to resort to basic customer discovery and to keep testing at every step of your progress. No one can predict with certainty how a prospective customer who loves your concept will behave when he or she is actually asked to pay for and use it. No one can anticipate how a product will work in the field in the hands of dispassionate customers.

For example, I got in the mail this week from Abbott a home pacemaker monitor, which was offered free of charge (thank you, Medicare), and which I didn’t really need. I made it clear in advance that I have no land lines anywhere to connect it and was told it’s totally wireless. What I got was a device with only a landline bundle and no instructions for anything else. Worse yet, it came with a guide on a CD-ROM disc. I no longer own a device to play that, even though I once had a CD-ROM based content business, in the early 90’s, when CD-ROM’s were a medium for content. I can’t even go back and look at my own really cool products. Somehow our healthcare industry is running about 2 decades behind our consumer electronics habits. The net of this is, healthcare lives in a perpetual suspension of disbelief, and this gizmo is on its way back. I won’t bore you with how much time it took me to handle that little nuisance. But, it makes the point that, especially in the healthcare arena, you have to be doubly careful about fooling yourself on product offerings.  

All that is to say honesty is indeed the best policy. I’ll stop here because brevity is also a virtue.