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Many promising entrepreneurs and business owners seek investment, making it tough to convince someone to invest in their idea/startup. As a result, some individuals tend to exaggerate the quality of their ideas or products. If the venture succeeds and generates substantial profits, investors are usually satisfied. However, dissatisfaction may arise if things don't go as planned — and they do a lot of times!
Fundraising is a long process that may take months before making any decision. Why months? Because every responsible fund conducts due diligence, delving deep into the startup and analyzing every aspect of it takes time. Some funds also attract external experts – we use this practice in Vibranium.VC.
Related: The Importance Of Honesty And Integrity In Business
Why dishonesty is so tempting
The deceptive temptation to take shortcuts is often based on a desire to present the startup in the best light possible, attracting investors and customers with an idealized version of reality. However, this slippery slope can lead to potential pitfalls, where one small untruth snowballs into a catastrophic downfall for a startup.
Back in fall 2023, we were considering one startup for potential investment, conducted analysis, and held interviews — standard procedures for every potential investment we make. The company was making about $2M in annual revenues, growing and positive. But we felt that there was something off; every time we asked for DEMO access to the platform, the founder would throw a fit, not wanting to cooperate. Even though, during our calls, the founder would operate a demonstration showing how the platform creates value for its customers.
So, we decided to conduct additional technical due diligence with two different expert teams. It turned out that we were shown an excellent Figma design all this time without an actual platform behind it. This project was a classic "fake it till you make it," and it was a deal breaker for us. We can understand that sometimes MVP is still in the process of making, but a deliberate lie that the revenues generated in the company come from nonexisting platforms was a no-go for us.
Entrepreneurs may underestimate the consequences of dishonesty, believing that the ends justify the means. Yet, the truth has a way of revealing itself, and when it does, the repercussions can be severe, from ruined reputations to legal consequences. Giving in to the temptation to be deceptive can seriously harm the foundation of a startup.
Related: Stop Lying to Your Team — And Yourself. Try Radical Honesty Instead.
Turn the truth into your strategic asset
Statistics indicate that, on average, the partnership between an investor and a startup lasts longer in the USA than a marriage – more people divorce faster than investors and startups part ways, achieving exit.
Based on my experience, honesty emerges as a powerful strategic asset for entrepreneurs. Successful businesses have thrived on transparency and building trust with customers, investors, and employees. Honesty is not just a moral imperative but a smart business move fostering long-term relationships.
Several examples in the business world showcase the impact of truth as a strategic asset. Even when the news is not entirely positive, companies that openly communicate their challenges and successes often gain respect and loyalty from their stakeholders. By being forthright about shortcomings or setbacks, entrepreneurs can build a foundation of trust that withstands the test of time.
When an investor has to decide in complex startup situations, for example, to support the startup or not for the second or third time, if there is no trust, the investor is likely not to support the startup because they will already feel deceived. Therefore, it is very important to embed these relationships from the very beginning on the principles of transparency, openness, and honesty. These basic things are important because they form the foundation for future years of relationships and communication between the investor and the startup. There have been cases where some of our startups needed bridge rounds, and we were ready to support them because they were honest about their situations and what they needed.
Related: 3 Ways to Build a Culture of Radical Honesty (and How It Can Transform Your Business)
Navigating the gray areas
In the complex entrepreneurship landscape, ethical dilemmas often arise in grey areas. A gray area is an area or situation in which it is difficult to judge what is right and wrong. Entrepreneurs face tough decisions that test their commitment to honesty. Real-world scenarios illustrate the importance of choosing the path of transparency, showcasing positive outcomes resulting from these decisions.
Navigating the grey areas requires a commitment to ethical decision-making. Entrepreneurs must weigh short-term gains against long-term consequences, recognizing that honesty, even when uncomfortable, ultimately builds a more robust and resilient business foundation.
Related: Science Has Confirmed That Honesty Really Is the Best Policy in the Workplace
Culture of honesty
Being honest in the world of entrepreneurship can be challenging, especially when money is involved – that might be a real test for a startup. Just like when we build relationships with our life partner or spouse, if these relationships start with lies, even if they're seemingly innocent lies, they can start to erode and create cracks in the future.
Entrepreneurs can actively cultivate a culture of honesty within their startups. Open communication, trust-building, and accountability are crucial in fostering a workplace environment where honesty thrives. Successful companies prioritizing honesty as a core value often experience heightened employee loyalty and increased customer satisfaction.
By setting the tone from the top down, entrepreneurs can create a culture where team members feel empowered to be transparent about challenges and uncertainties. This culture promotes ethical behavior and enhances collaboration and innovation within the startup.
In the competitive entrepreneurship landscape, the stakes are high, and the journey to success is filled with challenges. The deceptive temptation may seem like a shortcut, but it will lead to a dead-end sooner or later, trust me. Embracing honesty, not just as a moral code but as a strategic advantage, can be the key differentiator between thriving and falling.
