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Be forthright with investors about your firm’s performance

Posted by Kanika Sinha

April 13, 2022    |     5-minute read (835 words)

The overenthusiasm of the health startup Theranos’ young founder, Elizabeth Holmes led to exaggeration, falsity, and finally to her facing criminal fraud charges. Similarly, Adam Rogas, CEO of cyber fraud prevention company NS8 recently pleaded guilty to defrauding investors by using fake financial statements — that showed millions of dollars of revenues and assets that didn’t exist — to raise more than $100 million in financing.

While these stories have provided salacious fodder for newspapers, books, films and podcasts, they also present a cautionary tale for entrepreneurs: transparency and honesty aren’t options; they are necessities.

Why transparency matters

While vying for funds, often working to secure returns for friends and family, and chasing dreams of greatness, entrepreneurs quite often obfuscate truths, sugarcoat success, or fake it — that detract from the carefully orchestrated forward momentum. Such deception, intentional or not, usually backfires. However, transparency never fails, especially at the earliest stages of fundraising, and should be the priority of every founder.

Here are three reasons why you should always be forthright with your potential investors: 

It builds credibility and trust. Transparency establishes trust over and faster than anything else. The more forthright you are, the faster you and your partners become comfortable with one another. The same stands true for your investors. The most profound indicator of integrity and respect is the willingness to reveal uncomfortable things — bad metrics, wrongdoings, and even defeats. The generated trust then leads to expedited resolution, a win for all parties involved.

It maximizes the probability of getting the right help at the right time. The more known your problems and predicaments are, the higher the probability of you receiving a lending hand. In fact, communicating your challenges can help you leverage your teammates and investors more. In other words, by leaning on other intelligent people you would be able to cope with challenges better and accomplish more. 

Investors are always on the lookout. While one might assume early-stage investors make decisions based on a few Google searches and gut instincts, some angels and most fund investors do a significant amount of due diligence on any opportunity they consider seriously — financial statements analysis, market sizing, competitive analysis, expert references. 

Be an entrepreneur who leads with optimism and transparency

As an entrepreneur, you’ll encounter many hills and valleys growing your startup. Keep in mind that as much as you want to present positive information to investors, it’s equally important to be forthright when the performance falls short of expectations.

Here are some guidelines for behavior that can help you be both successful and honest— to the benefit of all.

Never “fake it.” What many don’t understand is that as a philosophy, “fake it till you make it” was never about playing with the truth. It simply suggests adopting a mindset that you’ll succeed, even when you’re not confident about achieving success. While it’s fine to project an optimistic view of where product development and financials will be in the future, it’s crucial to present reality — and that reality may not be what you wish were true when reporting on the current state of product development, actual customers, market size and financial performance.

Don’t be on an ego-driven high. While ego enables founders to take huge risks to create and run with their vision, outsized confidence and ego are traits that can cause a few of them to lose their sagacity. With their moral compass adrift, they deceive to get ahead. They unleash a stream of untruths, half-truths that support their made-up reality and often don’t stop till they are caught in the lie. Avoid being on an ego-driven high or indulging in bluffs— spelling doom for your startup.

Avoid stretching the truth. No matter what, never allow the pressure from investors looking for good news to tempt you to exaggerate or sugarcoat the truth. Instead, always remain virtuous and convey a straightforward, clear message that provides a complete — and realistic — understanding of the company’s fundamentals and performance.

Inform your challenges. While it’s natural for the founders to be more willing to showcase positive news to the investors, what most don’t understand is that presenting challenges and struggles is just as critical. Your problems can snowball into bigger issues if you don’t communicate them. 

Be proactive about sharing more information. Don’t sit on facts or any other company-related information hoping no one asks. Else, you’ll end up with investors who are ill-equipped to make an informed decision, leaving you with no or ignorant money.

Lead with optimism, know the reality. While being an optimist is an essential aspect of being a successful entrepreneur, it must be coupled with an understanding of the realistic situation on the ground. Ignoring expert guidance, data and facts is not leadership — it is foolish and begets a false sense of optimism. When challenges inevitably arise, make sure to stay positive yet realistic about what needs to happen to make changes for the better.

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