Going From Faking It to Making It

European Straits #74

Dear all,

Worldwide, a heated conversation is rising around the idea that entrepreneurs are liars. Two days ago, The Financial Times’s Andrew Hill wrote an article in which he says that “entrepreneurs bluff all the time”. A few days before, New York Magazine’s Reeves Wiedeman dedicated an in-depth piece to the faltering Vice media empire. There, lying seems to be a key part of the ‘problem’.

And then there’s the Theranos saga, which saw Elizabeth Holmes make the long journey from being on the cover of the New Yorker to being criminally charged for having allegedly made fraudulent claims about the company’s product. The driving force behind that story is the French-American journalist John Carreyrou, whose riveting book Bad Blood became the talk of the town on Twitter.

We at The Family have always been interested in this discussion of the line between optimism and lying, as one of the key pieces of advice we give to entrepreneurs is, “Fake it until you make it”.

That phrase really needs to be properly understood. We don’t say: “Put your customers’ lives in danger” or “Set up a Ponzi scheme to get rich fast”. The much simpler idea behind this basic customer development principle is that because it can take a lot of time and effort before going to market, you need to understand your customers even before you have a product. And to achieve that, it sometimes helps to benignly suggest that the product is almost ready to launch.

Coming from the government, I’ve always been quite at ease with all this. Every year, every government in the world ‘lies’ about the state of the budget as well as the projected revenues and deficits for the coming year. And it’s really not a big deal; rather, it’s all part of the game of managing voters’ (and financial markets’) expectations. The real question is how do the press and the public still fall for it, year after year? In fact, they don’t—not anymore. With Donald Trump taking on the mantle of Liar-in-Chief, now there’s a heated discussion about whether or not journalists should call his lies, “lies”.

But maybe we should be holding entrepreneurs to a higher standard than Trump? On that, let me share a few ideas. For one, if over-optimistic salesmanship equals lying for you, then it’s true: Entrepreneurs are liars. Here’s a quote from William H. Janeway’s wonderful book Doing Capitalism in the Innovation Economy (p. 82 in the second edition):

“[My] experiences prompted me to formulate what I call the First Law of Venture Capital: “All entrepreneurs lie.” That is, entrepreneurs begin by proposing to change the world through their own efforts. The promises they make to their financiers, customers and employees are sufficiently unlikely to be realized for confident assertion that they will be achieved to challenge any conventional definition of reasonable truth.”

Next, on an even higher level, reality distortion is a necessary part of entrepreneurship. Because it’s about changing something in the world, there’s always a gap between the vision and the execution. If you’ve read Steve Jobs’s biography by Walter Isaacson, you know that the late Apple boss was famous for refusing to acknowledge all of the world’s limitations and constraints. And my view is that this distortion field is a critical part of any entrepreneurial venture. It serves the same purpose as a “theory” as defined by Andy Grove (reacting to Clay Christensen’s work): “A common language and a common way to frame the problem so that we can reach consensus around a counter-intuitive course of action”.

Finally, I think that a critical feature of a healthy ecosystem is that it doesn’t force entrepreneurs to move from salesmanship to lying. How? Simply by not asking the wrong questions.

The first question from angel investors in a toxic environment is always, “What’s your business plan?”. Yet what’s the key feature of a startup according to Steve Blank? It’s a “temporary organization in search of a business model”—and so it’s incapable of detailing a business plan! Thus there are two possibilities. In a toxic environment, the business plan question is asked and the entrepreneur is forced to lie: “Here’s the next 3 years. Can you sign the check, please?” In a healthy ecosystem, nobody asks that stupid question, which relieves entrepreneurs from the burden of lying from the very start. (And because lies can be a powerful drug, it’s better not to induce them early on.)

All of this is needed to understand the Theranos case. As noted on Twitter by Social Impact Capital's Sarah Cone, Theranos was never really a Silicon Valley startup: “[Theranos] was no more a Silicon Valley company than the local Pizza Hut franchise located on Sand Hill Road. It wasn’t a proper “Silicon Valley” company in its investors, board, management style, ethos, employees, fundraising, or any axis that matters. What it did is look like a Silicon Valley company to outsiders that didn’t know better, and that was the con.”

In fact, it started far away from the Bay Area, in an environment and with investors, such as Betsy DeVos and Rupert Murdoch, that had nothing to do with Silicon Valley. This was a typically toxic environment of backward-looking thinkers in which stupid questions are asked early and lies must be told so as to satisfy the questioners. It certainly contributed to putting Theranos on the wrong path: their leadership proved adept at lying and they kept on doing it until it became an actual fraud that was putting patients’ lives in danger.

On the other hand, people in Silicon Valley, with a strong system of checks and balances in terms of just how far “Fake it until you make it” can go, weren’t fooled. And that is the kind of ecosystem that everyone should be aiming for. Healthy ecosystems don't push entrepreneurs to fake things that will bring harm to anyone; it's on both the ecosystem and the entrepreneurs to not go too far in the faking part.

This, by the way, is a large part of the value added by The Family. In the past five years, we’ve managed to create an insulated ecosystem in which entrepreneurs do not feel obliged to lie around the family table. In turn, this makes it possible to know what’s truly going on in their startup and build a relationship of trust, which really is our most valuable asset. I wish it were the same (no pressure to lie and appropriate checks and balances) across the entire European startup ecosystem.

Alas, we’re very far from that. There are still too many angel investors asking the wrong questions; too many journalists and government officials who don’t comprehend what startups are; too many large corporations that don’t understand where the value lies in startups and . No wonder entrepreneurs feel obliged to fake it, when making it in Europe is still a very long shot. There’s a lot of work left to do!

Warm regards (from London, UK),

Nicolas