The Line Between Entrepreneur and Fraudster Is Razor Thin

“It was $3 million for a single sheet of acrylic,” entrepreneur I laughs, joking. When he took the stage at TechCrunch, he used a small sheet of acrylic to convey the image of a product that didn’t exist yet, not even as a prototype. It went over extremely well, and he later succeeded in raising $3 million in funding. He’s no fraudster — he went on to properly launch the business, and he’s still respected today as a pioneer of AR.

At his next company, though, he raised money using a similar approach, and this time the launch didn’t go well. Things went adrift, and he was eventually pushed out of the very company he had founded as CEO. Some people call him a fraudster for that.

I think part of this comes down to how good he is at presenting. Many entrepreneurs speak in a way where the line between “what has been accomplished” and “what is going to be done” stays blurry. This isn’t malicious — for them, that boundary just doesn’t carry much weight. But it carries enormous weight for investors and for the employees working at the startup. When that gap comes to light, the entrepreneur ends up being called a “fraudster.”

Handling media coverage requires particular care here. Faced with that kind of blurry boundary, media outlets steer the impression toward whichever version is more sensational. This isn’t a matter of twisting facts — it’s simply a matter of framing things in a way that can be spun in that direction. What usually happens is that the caveats and supplementary context stated earlier get stripped away, or a portion gets cut out and presented on its own. I’ve always believed that startup executives should keep their media exposure to a minimum. It would be wonderful if a friendly outlet always covered exactly what you wanted said, but in most cases, outlets say what they want to say. A gap opens up here too. It starts small, but it accumulates over time, and once it has grown large enough, if the discrepancy with the truth comes to light, the person gets called a “fraudster” all over again.

Most of the time, being branded a fraudster happens this way — unintentionally, with the person almost a victim of the label. But it can’t be denied that some startup executives really do commit fraud with deliberate intent.

The Theranos story in Silicon Valley is a very famous example. Elizabeth Holmes swept the scene with the powerful message that “a single drop of blood can reveal every disease,” and built a medical startup around it. She raised tens of billions of yen, but the technology was never actually established — it later came out that many of the test results had simply been faked. It was a shocking, major scandal. Anyone involved in startups reacts to it with a “give me a break,” because it was certain to make investors more wary across the board. I was involved in healthcare at the time, so I felt that particularly strongly.

Even so, part of this has to be taken as a lesson: watch others, and correct yourself. For anyone involved in a startup, isn’t this true to some degree for everyone? Take the act of raising a big banner for your cause — nearly every startup does exactly that, without exception. I’ve never seen a startup that only ever talks about what’s achievable right now. A company like that wouldn’t even be called a startup. Ask most people whether something is possible, whether there’s a real prospect for it, and they’ll answer “yes” instantly and with total confidence. When researching numbers like market size, don’t you pick the best-looking figure out of several data sources to use in your presentation deck? Don’t you quietly tuck away into a drawer the data that isn’t quite so flattering, even if you wouldn’t call it outright negative?

When an engineer says, “There’s no way, we won’t make it in time,” don’t you turn around and tell outsiders, “We’ll make it”? When the CFO says, “If we don’t raise funds by the end of the year, we can’t keep the business running,” don’t you tell your business partners, “There’s no funding concern for the next two or three years”? Haven’t you gone around telling people “talks on a business partnership with Company X are progressing,” when you’ve really only met with them once or twice? If these small bits of bluffing eventually grow into a problem that draws in your stakeholders, you risk being called a “fraudster.”

At the same time, I think there’s also room to see turning a bluff into reality as part of the real thrill of being an entrepreneur. Professionals in startup investing evaluate people and businesses with that kind of bluffing already factored in. You might even call it a game played between professionals. But in the Theranos case, what makes it especially malicious, I think, is that many of the stakeholders — the investors and backers — were “mere power brokers” with no real expertise in either medicine or startups.

The content of this post is an excerpt (original text) from the following book. If you’re interested, please pick up a copy.

The Shape of a Happy IoT Startup

The Shape of a Happy IoT Startup

Originally published in Japanese at https://clazytech.com/2022/08/1066/. Translated with LLM assistance and reviewed before publication.