Just from the article’s title you probably think you know everything I’m going to say, right? I predict not but soon we will find out. The basics definitions of aspirations, exaggerations and lies is well understood. But I don’t think most startup founders understand how bad they are at predicting the future, how far they stretch their claims and how much refactoring investors have to do with them as a result. This article explains all that in more detail while also helping founders figure out the best ways to earn respect and credibility. And doing so while still coming across as driven, passionate and absolutely unstoppable.
Startup ventures are extremely risky and with landmines seemingly around every corner. The most successful entrepreneurs thrive in the face of perpetual chaos and skepticism. They have unmatched survival strengths and are regularly told to “fake it ‘till you make it”. All of this is just the reality of the early days of building a great company.
The issue comes down to the parallel need to earn respect and credibility from other stakeholders that will ultimately determine the success of the venture. I’m talking about early employees, customers, business partners and investors. Most of this article will convey the viewpoint of the investors but the same concepts apply to founders’ interactions with the other mentioned stakeholders.
An “aspiration” is defined as a hope or ambition of achieving something. In the early days, startups have lots of them. In fact, I previously wrote an article titled “Your Initial Business Plan is a Huge List of Assumptions”. Most of those assumptions are actually aspirations that need to be true in order for the proposed business plan to hang together without a pivot.
My friend and Capital Factory business partner, Joshua Baer, often recommends that founders forecast to investors what they are going to do (accomplish) in the near future and then just go do that. Maybe it relates to acquiring a certain number of customers or securing an important partnership. Josh stresses that it’s so difficult for startups to predict the future that just doing what they said they were going to do is hugely impressive to investors.
Prototypical startups are off-the-charts optimistic and often with first-time founders that are either just starting or early in their business career. Because of this, their forecasts (aspirations) are WAY too aggressive or optimistic. I’m not talking about their long-term vision and potential but rather their predictions of what will happen in the next 90 days and especially the next 12 months.
Most active investors are experienced pattern matchers. They’ve interacted with hundreds of startups, which means they’ve heard hundreds of forecasts and predictions. Since 90% of them aren’t achieved, it’s no surprise that investors automatically apply a “haircut” to them without even thinking about it. I know what you’re thinking: “We’re not like every other startup”. It’s totally possible that you are a member of the 10% club but you’re going to have to prove it first.
Your first step is to look backwards at your history of accomplishing what you said you were going to do. Look back to the prior goals and forecasts you and your co-founders wrote down. How many of them did you accomplish? 40-50% is probably typical, 20-30% is concerning and 70% or greater is impressive. I’m mostly talking about the pre-launch and early revenue phases of the company, when you’re still trying to develop a well-oiled machine. The bar obviously gets much higher as you reach $1-2M in revenue and are seeking a Series A round of funding (for more on this, read my articles titled “A Series A Isn’t Just a Large Seed Round” and “Series A Sweet Spot Combines Size & Slope”).
If your prior track record is favorable, great. If not, you need to quickly get to work on improving it so that you can demonstrate to investors that you’re a member of the elite 10% that accomplishes what they say they will. To do this you need to understand that there are two key parts of the equation:
- Prediction – As was mentioned before, foretelling the future is extremely difficult, especially for a startup venture. It takes practice and a learned ability to figure out which inputs to weigh greater than others. The evolution of your business (customers, competitors, employees, etc) means the types and quantities of inputs are regularly changing. This further complicates things because it’s like the rules are ever-changing. They are.
- Execution – When you saw the future in the crystal ball, you made assumptions about your team’s ability to execute their respective roles in order to accomplish the stated goals. But by doing so you just made three key assumptions.
- You are capable of communicating the goals in such a way that they are well understood
- Your team is able to perform their required tasks, both as individuals and as a coordinated team
- You are able to quickly adjust and adapt if/when things don’t play out as expected
Side Note: The CEO of TSMC, Morris Chang, is credited for a quote that I really like. He said “Without strategy, execution is aimless. Without execution, strategy is useless.” A simple corollary to that quote could be created by substituting “prediction” for “strategy”.
Unfortunately, you don’t get credit for missing your predictions due to unforeseen circumstances. From the investor’s perspective, the exercise is simple. You said you will accomplish X. Did you accomplish or exceed X in order to become a member of the 10% club that are able to do that regularly? They’re good at prediction and adaptive execution.
It’s true that in the earliest days you probably have part-time, volunteer and third-party contributors to your efforts. That makes both prediction and execution even more difficult. Now you know why 90% of startups don’t accomplish what they said they will, even over short periods of time.
The only way to get good at this is to build a culture of predicting, executing, measuring, refining and repeating again and again and again. Not only will this pay dividends in the early days while you’re trying to become a part of the 10% club but also in the future when you set a goal of generating $50M in annual revenue and becoming profitable.
Side Note: I remember when my friend and former boss, Joel Trammell, asked me to describe the #1 responsibility of a Sales VP. I fell into his trap when I confidently answered “maximizing revenue”. He said something like “No, that’s their second most important responsibility. Their first is delivering predictability of revenue, because that gives the organization visibility into the future, which means it can adjust and adapt if necessary, rather than simply react after the fact.” Touché, Mr. Trammell!
Just as investors apply a “haircut” to stated predictions until you demonstrate a track record of achieving them, unfortunately they’ve learned that it is best practice to do the same with your stated claims about what has already been accomplished. This is due to the regular exaggerations that most founders make. I know, not you. Let me give some examples to see if you still feel the same.
Claim: “We have a product that can do A, B and C.”
Reality: “We are building a product that can do A, B and C.”
Claim: “We’re currently at $25K in MRR.”
Reality: “Last month we recognized $25K in revenue. $20K was from subscription software and $5K was from a one-off services project.”
Claim: “We have an awesome team of 5 people.”
Reality: “We have 2 full-timers, 2 part-timers and 1 advisor.”
Claim: “We’ve closed $300K of our $1M seed round.”
Reality: “For our $1M seed round we have $100K in the bank, $150K in verbal commits and $50K soft-circled as likely.”
Claim: “We already have 5 customers.
Reality: “We gave 3 of our original beta customers free licenses for six months, have 1 paying customer and 1 late stage trial that we expect to covert soon.”
You see where I’m coming from. The difference is reflected in words you use like “have” and “closed”. It’s after the investor “double-clicks” for clarification that they discover what they consider an exaggeration. Sometimes it’s actually the omission of information that causes the perception of exaggerating.
What you have to decide is how far to push these exaggerations. The investors expect you to be aggressive, boastful and proud. And you might not actually get penalized for minor exaggerations here and there. But if you were to stack up all five of the claims made previously, you’re going to have a credibility problem on your hands. That means continued “haircuts” to every claim you make rather than gradually-earned credibility.
Like exaggerations, outright lies are discovered during the interrogative due diligence process. They either result from something you think is a slight exaggeration but the investor begs to differ or from the way you answer their questions. Let’s use the example claim above about already having 5 customers. If the investor asks “Are they actual paying customers?”, you have a choice. You can answer the way the Reality statement was worded above or you can say that “four of the five are paying customers”. That would be an outright lie because three of the four have a free license.
Eyeing a cash fume date that’s just around the corner can cause us to do crazy things that we would never do in more normal situations. But it’s not just your cash fume date that can cause these misjudgments in ethics. Desperately wanting to show that you accomplished what you said you would do or being in the final push to get a funding round closed so that you can return your focus to building a great company can offer the same tempting risk. Don’t do it!!!
Getting caught in an outright lie crosses an important line for many investors. If you’ll lie about one thing, why not many more things throughout the future of the company? Building trust with your stakeholders (not just investors) is paramount to being able to call on them during very difficult times to help bail you out of a mess. Same for asking them to open their Rolodex to make a key introduction. The negative ways that lying can impact you are infinite.
Nothing in this article should cause you to be less bold, driven, confident, passionate and unstoppable. Those personality traits are 100% compatible with building a well-oiled machine that is able to predict the future, achieve it and do so with high ethics and hugely-loyal stakeholders. And remember that while this article used investors as the proxy stakeholder, the same principals apply to others that are critical to your success – employees, customers and business partners.