How to Avoid Doing Fraud
Avoid taking the first step.
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There is a constant parade of formerly high profile tech companies that were revealed to be nothing but frauds. FTX, Wirecard, IRL, Frank and dozens of others all were caught fabricating their business metrics to raise steal money from investors and/or defraud their customers in just the past few years. There are likely many more fraudulent companies that simply haven’t been caught yet.
Most of these founders did not set out to be criminals. Sure, some did, but most of them genuinely wanted to create a valuable company.
You can almost understand how you start out as a visionary founder and end up as a criminal:
You have a clear vision for a revolutionary future. That future is so real to you that you can pitch it to investors with amazing energy and conviction to raise money.
With investor money in hand, you go about pursuing your vision and it goes okay but not as well as you’d hoped. You believe in your vision and know it’s only a matter of time before it starts working. You just need more time.
You need to back up your vision with evidence! Since the future is so close, you just bend the rules a little so your metrics catch up with your vision. It’s a temporary shortcut as your vision is just out of reach right now.
You bent the rules once and your vision has still not arrived, so why not bend them one more time? It’s fine, because you know that it’s only a matter of time before your vision is reality.
Pretty soon, you bent the rules so much that you can’t stop. Stopping would be admitting you bent the rules and that would mean the end of your story! You have to keep bending the rules to give your vision time to arrive.
Eventually, your vision is gone and all that is left is the fraud. You have to keep the fraud going because you realize that if you stop, the game is over.
This is not an excuse or even an explanation. These frauds are crimes and they should be punished as such!
At the same time, this story doesn’t sound so different from some of the apocryphal stories we celebrate about tech companies. How about the time the AirBnB founders sold cereal to survive until their vision arrived? What makes one an inspirational story and the other a fraud?
Well, lying for one. These frauds lied about the business, whereas the AirBnB founders just struggled. It is true that the nature of venture capital fundraising does create a fine line between inspiring with your vision and lying about reality, but you can never lose sight of that line.
I’ve been there, and I understand the temptation. Imagine you are so close to hitting your quarter target, but there is one deal that hasn't been signed yet. You know it will close, but you need to report to your board right now. Do you tell the truth, or lie a little bit and say the deal has closed? Do you report that you hit your goal, or do you tell the truth? I’ve been in that position and felt the pull both ways. So, what do you do?
You tell the truth. In fact, the most important rule of business is that you never lie about your metrics. I’ll repeat that:
Never lie about your metrics.
That is the step that leads to these frauds. In fact, you only need to lie once for it to be a fraud! (technically) It seems harmless to lie a little bit, and reporting that you hit your goal feels much better than missing it. However, that first time you lie about your metrics you are on a dangerous path.
Now, there are times when you make honest mistakes. You might calculate a metric incorrectly, or have reported a deal as closed because you thought it was. Those are still lies, even if you didn’t mean it, and you need to correct the record as quickly as possible. Just because you lied by accident doesn’t change the rule and, in fact, makes it more important.
This might all seem like common sense, but it’s surprisingly hard to follow. In a highly competitive environment, every edge counts. Consider:
What if you find out your competitors are lying about their metrics, to make them look bigger than you? Do you let them raise more money or do you lie too?
What if your key employees are watching other companies grow faster than yours and you risk losing them? Do you lie to them or do you risk having the company fall apart?
What if an acquirer makes an offer where you would take home $30M, if only you reach a few metrics? Do you give up the money when you miss, or do you lie?
You absolutely do not lie, you tell the truth. However, the pressure and temptation to lie can get intense, especially if you see everyone around you doing it.
You also read about people who lied and got away with it, making fortunes while you struggle and tell the truth about it. It’s hard, I know, and I won’t link to those stories here as I don’t want to make it worse.
In the end, it’s your choice. There’s nothing I can tell you that can prevent you from lying if you want to. I can tell you I have never done so and I sleep very well at night, never worrying that I’ll get caught in a lie.
It’s a good path, I recommend it.
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And how about the Queen of Fraud? Charlie Javice swindled JP Morgan out of $175 million by using a data-sciences professor to fabricate her database of college-bound seniors.