Entrepreneurs and the Truth

Such chicanery is too common in the start-up world. The norms of entrepreneurship encourage founders to be hustlers and evangelists for their companies. Indeed, legendary founders are celebrated for their ability to inspire others, even if that means stretching the truth. Consider Steve Jobs, the quintessential start-up pitchman. Early Apple employees describe him as able to “convince anyone of practically anything.” In the words of engineer Andy Hertzfeld, Jobs had a “reality distortion field, a confounding mélange of a charismatic rhetorical style, an indomitable will, and an eagerness to bend any fact to fit the purpose at hand.”

That’s a vital skill for founders, who must persuade their audiences to temporarily suspend disbelief and see the opportunity the entrepreneur sees: a world that could be but is not now. However, reality distortion is a slippery slope. Enthusiasm can lead to exaggeration, exaggeration to falsity, and falsity to fraud. This descent is embodied in Elizabeth Holmes, the Theranos founder and Jobs devotee who allegedly deceived investors and customers by marketing bogus blood tests.

The Holmes case is rare; few entrepreneurs face criminal fraud charges, as Holmes did when this article went to press. But lesser indiscretions are common, including obfuscation, lies of omission, exaggeration, embellishment, evasion, bluffs, and half-truths. And they come at a cost. Deception results in market inefficiencies; it locks up resources by prolonging the lives of doomed ventures and making it difficult for VCs and employees to know where best to invest their money or labor. We believe it also takes a personal toll on founders, given the debilitating stress that often accompanies lying.

Reality distortion is a slippery slope. Enthusiasm can lead to exaggeration, exaggeration to falsity, and falsity to fraud.

How can we drive deception out of the start-up culture while also encouraging entrepreneurs to take risks and dream big? We have spent decades researching this question, and we bring a multidisciplinary approach to answering it. One of us (Kyle) is a successful founder turned academic; one (Jon) teaches business and philosophy; and two (Tom and Laura) hold academic appointments focused on ethical entrepreneurship. In this article we first explore why deception is so prevalent among entrepreneurs and then explain why common justifications for it are invalid. Finally, we suggest guidelines for behavior that can help entrepreneurs be both successful and honest—to the benefit of all.

Why Entrepreneurs Lie

The Chicago economist Frank Knight was one of the first scholars to study the role of entrepreneurs in the modern capitalist system. In his 1921 book Risk, Uncertainty, and Profit, he distinguishes entrepreneurs from other businesspeople by their willingness to act in the face of uncertainty. Of course, established businesses face uncertainty too—but start-ups must navigate through a particularly dense fog. Entrepreneurs often don’t know whether their product will work, how it will be manufactured, who the customers will be, or how they can be reached. For Knight, an entrepreneur is someone who, facing all this uncertainty, acts while others dither.

But action alone is insufficient. An entrepreneur needs others’ help and must therefore be a persuasive cheerleader—when pitching VCs for funding, wooing prospective employees away from cushy jobs, persuading customers to take a chance on a new product, and instilling confidence in the team amid the start-up’s vacillating fortunes.

That’s the first reason some entrepreneurs are less than truthful: They transgress because they have many opportunities to do so. More than most other businesspeople, they are always “on.”

The second reason is that entrepreneurs have a lot on the line. As a group they stand to gain great wealth, but it’s unevenly distributed. Research shows that the median entrepreneur has poor risk-adjusted returns—statistically, founders would be better off working at an established company or holding a diversified index fund than holding their own equity. But what the median lacks, the maximum makes up for. A small percentage of entrepreneurs become enormously wealthy. Indeed, entrepreneurs dominate the ranks of the world’s richest people.

A thousand things must go right to earn such outsize rewards, and in any one meeting, a founder’s fortunes might balance on a knife’s edge. Failure can mean not just missing an enormous windfall but also letting down friends, family, employees, and investors. With stakes that high, it can be tempting to bend the truth.The third reason entrepreneurs are prone to deception is that it’s relatively easy for them to get away with it. Entrepreneurship has a great deal of what economists call “information asymmetry.” Typically, founders lead private, closely held companies and possess lots of information that others—investors, customers, employees—don’t have. The leaders of public companies have extensive transparency requirements and are under intense scrutiny; if they tell a lie, many people are in a position to discover it. But even in a venture-backed start-up with board oversight, only a tiny circle of people are privy to the company’s internal workings, so deceptions can easily evade detection or go unchallenged. And because start-ups are, on average, staying private longer than they used to, such opacity is increasingly common and persistent.

None of this is to say that entrepreneurs are less ethical than other businesspeople. What little research is available suggests that on average, they have higher moral standards than corporate managers do. But the pressures that might tempt them to be less than completely truthful are enormous—and decades of psychological study have shown that even people with high moral standards are likely to transgress in contexts in which ethical lapses are common and tolerated.

How Entrepreneurs Rationalize Their Lies

Most founders who shade the truth under such pressures probably don’t see themselves in a poor light. They often justify their actions through some combination of three rationalizations that are closely related to common ethical theories about what makes actions right or wrong. But each falls apart under even casual philosophical scrutiny.

“It’s for the greater good.” In 2018 Entrepreneur interviewed Gary Hirshberg, who built Stonyfield Farm from a two-person (and seven-cow) side hustle into one of the world’s leading purveyors of organic yogurt. Stonyfield’s success didn’t always seem destined. Hirshberg recounted a series of dire moments and the deceptions that saved the company, including lies to vendors and a loan officer at the Small Business Administration. He offered several rationales, all common among entrepreneurs and related to well-known theories of ethics.

“I think lying, if we want to call it that, which I guess is what it should be called, for the common good, because in the end it didn’t help the vendors for me to go under either, is OK as long as you ultimately do deliver,” Hirshberg explained. This “ends justify the means” rationalization harks back to the utilitarianism of Jeremy Bentham and John Stuart Mill, according to which an action should be judged solely on the basis of its consequences. “[I]t is the greatest happiness of the greatest number that is the measure of right and wrong,” Bentham wrote.

“I’m protecting my people.” A variant of the “ends justify the means” rationalization, this was invoked by Hirshberg as well. “You do whatever the heck you have to do to make it,” he said. “We were fighting for employees’ jobs and our mothers’ and mothers-in-laws’ and friends’ investments. Fighting for our lives. And I think anything goes, as long as you’re not injuring anybody.” Friends, family, and early equity investors and employees are often prioritized over stakeholders appearing on the scene later and at a further remove—in Hirshberg’s case, the SBA and his vendors.