Kyle Jensen, associate dean at the Yale School of Management, has seen firsthand just how tempting it is for entrepreneurs to lie. As a startup founder himself, he says they have to be always “on” and ready to promote their venture. Another reason they’re incentivized to exaggerate is that while many startups fail, successes can become billion-dollar enterprises. Finally, Jensen argues, misrepresenting is relatively easy to get away with in a field of unproven potential. He talks through infamous examples of entrepreneurs distorting the truth and how to change startup culture for the better. Jensen is a coauthor of the HBR article “Entrepreneurs and the Truth.”
CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review, I’m Curt Nickisch.
Fake it until you make it. It’s something we hear all the time, an idea that’s framed as innocent. That we can engage in embellishments about our skillset or past experiences, just so we can get a foot in the door and really prove what we can do – or in the case of a new business venture, so we can get the funding we’re asking for. But there’s a fine line between embellishment and misrepresentation.
Our guest today has studied what it is about startup culture and economics encourage exaggeration and even outright deception. He’s here to explain how even well-meaning entrepreneurs fall into these traps and to share how they can do better.
Kyle Jensen is the Director of Entrepreneurship and an Associate Dean at Yale School of Management. Along with Stanford’s Tom Byers, Laura Dunham of the University of St. Thomas, and John Fjeld of Duke, h e wrote the HBR article, “Entrepreneurs and the Truth”. Kyle, thanks so much for joining me.
KYLE JENSEN: Curt, it’s my great pleasure. Thanks for having me.
CURT NICKISCH: I love a simple headline like that, Entrepreneurs and the Truth. It’s very clear.
KYLE JENSEN: Is it? Yes. And in truth, the truth is sometimes lacking in entrepreneurship unfortunately.
CURT NICKISCH: Why is it that way?
KYLE JENSEN: Yeah. Well, it’s complicated. The most important reason is that entrepreneurs are always on. More than anybody else. Entrepreneurs start with nothing. They’re building a dream, a castle in the sky, something in which no one else believes, and they have to be passionate advocates for their projects all the time. It is an endeavor that requires unwavering confidence.
There’s some good reasons for that, even as an investor or an employee or another stakeholder associated with an entrepreneurial venture. I would say, “Look, if the founder doesn’t believe in this, why should I?” So there’s this impetus, this need for the founder to be wholly in to project great confidence and investors seek that out, people seek it out. If I’m going to join your startup company, I don’t want to see you vacillating or uncertain or filled with doubt. I feel comforted by your unwavering confidence. And the danger for entrepreneurs is that, that enthusiasm and confidence creeps into falsity, fraud in the extremes.
CURT NICKISCH: I remember hearing one time that somebody said, an entrepreneur is kind of somewhere between failure and crushing it.
KYLE JENSEN: You’re right that there are entrepreneurs mostly in those two extremes so that the act of entrepreneurship has a little bit of a different statistical distribution of outcomes than most things. So, let’s say I went into consulting or some kind of salaried job. I have some chance of making millions of dollars, but I can’t really make billions of dollars.
If you want to be a billionaire, there’s pretty much only one thing you can do in this world. And that’s become an entrepreneur. But most people don’t make it. Most entrepreneurs never become billionaires. So, they’re stuck in these two extremes and this is actually a second reason that entrepreneurs are sometimes guilty of bending the truth. There’s just a lot at stake. A million things need to go right. And you are juxtaposed between sometimes destitution and failure of your families and friends and the people who believe in you. And on the other hand, great wealth. Under such conditions, sometimes the truth suffers.
And the final one is information asymmetry, which means that I as the entrepreneur, I have a lot more information about my venture than you do, Curt. I know a lot, you know very little. I want your money and I can leave things out. I can paint an overly rosy picture and you really have no way of figuring out what information I have. And that’s more true for a startup than it is for something like a public company where they’re making public filings and everyone can see what last quarter’s revenue was and things like this.
CURT NICKISCH: Yeah. Now you’re an entrepreneur, yourself. You started and ran several ventures before you went into academia and I’m just curious what your personal experience with that was?
KYLE JENSEN: Actually, I’m a little bit like – in our HBR paper, we talk about the founder of Stonyfield and I have to say my own behavior as an entrepreneur, it’s similar to his. There are times when I have stretched the truth, where I felt pressured to, or just allowed someone to labor under some false belief.
There’s maybe, I’m talking to an investor or I was talking to an investor as an entrepreneur, and maybe that investor wasn’t fully aware that something had been tried before or that some competitor exists and I allow them to remain unaware. Or I paint just the best possible picture of my venture. That’s a very common way of thinking about what entrepreneurs should do.
Is that I’m going to paint the best possible picture, that’s my duty and your duty as the investor is to do your due diligence and all this stuff. So, I definitely felt a pressure as an entrepreneur. I can remember times in which I felt like I was loose with the truth, and I don’t feel awesome about it.
CURT NICKISCH: Yeah. Gary Hirshberg, who built Stonyfield Farm into this big national success. He was somebody who just talked about getting through some crisis points in the company by essentially misrepresenting to vendors a bit. His argument was that vendor’s kind of priced that in a little bit. They were sort of expecting some of that or knew that he was presenting things in a certain way.
But you also look at cases like Elizabeth Holmes at Theranos. Elizabeth Holmes is alleged to have really created a reality distortion field around the product –
KYLE JENSEN: First, I want to interject, too. You’re right that we do talk about a few of these entrepreneurs you mentioned in the HBR paper. And Gary Hirshberg is miles away, not even close to – he’s a regular entrepreneur and a great philanthropist, and as which is just a very different thing. I pick on him because he’s got… He did an incredible job of articulating the pressures that entrepreneurs go through and the rationalizations that they have for some of the deceptions involved.
CURT NICKISCH: Yeah.
KYLE JENSEN: But it’s a very different thing, of course then what Elizabeth Holmes is doing.
CURT NICKISCH: Or is accused of doing, yeah.
KYLE JENSEN: – is accused of doing, which is straight up lies about the technology, which is in a space where it has real harms, right. So, she’s selling bogus tests that she knows to be bogus according to the reporting in Bad Blood. And there’s some discussion in the book that seems to suggest that she’s thinking eventually everything will be okay. So this will all be for the greater good in the end. I just need to lie my way through this lull.
CURT NICKISCH: You talked about the rationalization there. Gary Hirshberg talked about rationalizing some of the things he did at certain times to get the company forward. And that speaks somehow to the bending of the truth in the startup world, being common even though it may manifest itself very differently.
KYLE JENSEN: I think you’re right that it is common. And you touched on earlier a point that maybe as entrepreneurs, we can say to ourselves, “This is the norm in entrepreneurship or investors are big boys and girls, and they’re responsible for their own due diligence. Or each party knows the rules of the game.”
So maybe lying in entrepreneurship or similar kinds of behaviors like obfuscation or omission of – maybe that’s just a rule, just like bluffing is allowed in poker. We don’t consider bluffing a violation, we expect it. Maybe entrepreneurs can think of lying in entrepreneurship – or obfuscation or exaggeration or whatever – as just like bluffing.
But ultimately I don’t think that holds water. I think that – wich is to say, we probably, almost certainly have an ethical obligation to each other to actually tell the truth. Now, this I should say this form of thinking is called ethical relativism where you think, “In this domain, what’s ethical is just what people do.”
CURT NICKISCH: Besides ethical relativism, what are the rationales? What are the ways that people rationalize things that they have to do or feel they have to do?
KYLE JENSEN: So the first is ethical relativism. So I would say, “Investors are big boys and girls, and this is just like bluffing in poker. Everyone does it.” Everyone knows that you can lie about your market size.
The other is to say, “Well, this is for the greater good.” So you might say, “Look, it doesn’t behoove my investors, or maybe it’s in their interest for me to deceive them briefly because the company is going to work out and they’re going to make billions.” Or something like this, right. Or I lie about the efficacy of a drug because ultimately I believe it’s going to work. And this is somewhat of the rationale that you can pick up Holmes having in the reporting on Theranos.
And the third is partiality. So this is something akin to our concept of shareholder capitalism. So I, as the entrepreneur, I am responsible for my shareholders, my stakeholders, the people who’ve invested in me. And everyone else I’m not responsible for. So my ethical obligation and what defines right and wrong is doing what’s in the best interest of those people and not anybody else.
And so, Hirshberg touches on this and says, “Look we had our families, our friends, they had put money into this company. And if I didn’t do my damnedest, even if that damnedest meant telling a fib here and there, then I wasn’t doing my duty.”
And a lot of entrepreneurs feel that, because it is crushing to have taken money from people who put their trust in you and to fail, because earlier it’s likely the case that you presented to them, a rosy picture, an enthusiastic future for the company. And so, you’re very afraid of failing. And so, you’re willing to go to great lengths to protect these people, even if that means hurting other people. And so, we would called that partiality as another justification.
CURT NICKISCH: That’s so interesting because it’s almost like, one rosy embellishment begets the pressure to deceive again.
KYLE JENSEN: Yeah. I think there’s definitely truth in what you say, but it is complicated. So I might, for example, paint an incredibly rosy picture and then add as an afterthought, the caveats, right. This is the fine print to the contract. This is the fast speaking individual telling you about side-effects at the end of the drug commercial, right.
And a lot of times that’s the nature of the discussion that we have in entrepreneurship. So, I tell you the best and then, “Yes, but by the way, startups are risky.” And so on and so forth. And so this, you might say is like inadequate consent. Imagine, for example, I’m an entrepreneur and I am, of course starting some fantastic new company, which of course is risky because it’s new and I’m speaking with a would be employee.
And I expect this employee to quit her job, to move her family across the coast, to take some lower salary on the promise of leadership opportunities and going public in the future and things like this. And I have some obligation to be to, I want to recruit her, but at the same time, I really have an obligation to make sure she’s fully informed about the riskiness of the endeavor and a lot of people, of course, in that situation, that person probably doesn’t have startup experience and doesn’t truly understand how risky startups are.
CURT NICKISCH: It’s also interesting because I mean, move fast and break things is a phrase we know, and Uber, when it started right, there wasn’t really a legal framework for ride sharing. So there are a lot of startups that kind of get going by breaking laws. There’s also a reverence in startups for not following the boring processes and the rules and so there are great things about doing that and there are terrible things about breaking laws and doing harm. It’s a really tricky stomping ground.s
KYLE JENSEN: I think let’s say take the case of Uber. So Uber, I agree. It did some very distasteful things early on, including for example, reportedly designing software that would evade tracking by law enforcement and running a rideshare operation in jurisdictions where it was unapproved. And I think a large part of that rationalization is that, “Well, this law is unjust.”
CURT NICKISCH: Yeah. And misinformed.
KYLE JENSEN: Yeah. It’s misinformed now, now. So you’re right. You’re absolutely right, Curt. So it’s an argument and it’s a self-serving argument for the greater good that the world is going to be better if you didn’t have this law and with our ride sharing. So we’re just going to launch this ride sharing, even though it’s against the law and they are right that not all things that are legal are ethical and not all things that are illegal are unethical.
And of course we’ve had many unjust, unethical laws in our country for some time, but, Martin Luther King of course, famously who wrote about ethics. He said that there were some laws that were so unjust that it called for violating them. Now, I don’t think that local taxi cab laws are rise to that ethical level, right. So I really do think it was a wrong thing for Uber to do, to operate in these jurisdictions where it was illegal. And then you have to wonder what is the lesson that employees derive from a company’s willingness to do something that is illegal and potentially unethical, right? So one thing I could take away from that as an employee is that that rules don’t matter. And then you might ask yourself, what does that contribute to the early unfriendly culture within Uber? That led to the ouster of the CEO, the founding CEO.
CURT NICKISCH: Let’s talk a little bit about the harm of this, because we’ve really talked about the motivations and rationalizations of entrepreneurs to put a good face on things and will a company forward. Where does it come back to bite them? What goes wrong?
KYLE JENSEN: Actually, I don’t think it often does come back to bite entrepreneurs. There’s a handful of people who become known as shysters or serial liars or who got out over their skis too far. But honestly, I do not think it is the case that entrepreneurs often face the consequences of deception. Now there are consequences, but those consequences I don’t think are faced by the entrepreneurs themselves who would face consequences. I gave you an example early of me hiring someone and being super enthusiastic. Any entrepreneur whose company has gone belly up can tell you about people that they wooed to their company who made large decisions and were fired when the company went belly up. And these people can be really effected by exaggeration or falsity or untruths. Same is true of early stage angel investors, of course, the people who participate in friends, fools, and families around these so-called triple F rounds. To a lesser degree, professional investors, but not always to their exclusion. If you look at who is invested in Theranos, of course these are very professional, sophisticated people.
CURT NICKISCH: It also sounds like maybe the system isn’t really set up to disincentivize or turn away bad actors, right. But we’re also recognizing that a lot of entrepreneurs go into their ventures with good intentions. So maybe we can talk about some specific things that individuals in these situations can do to avoid lying or put some of their optimism in appropriate context, in a way that is kind of honorable and meaningful.
KYLE JENSEN: So one of the things we talk about in the paper is just telling people, showing people your data, to show, don’t tell. And when we articulate this in terms of a conclusion sandwich. So let’s say, for example, I want to convince you of the rosy prospects for the next fiscal year. I might say sales are going to be gangbusters, which is my conclusion. That’s the top of the sandwich. And then I’m going to put in my data here, I would say, we collected this data, or we show this growth in this sector. We’re selling this much of this product, and we’re doing this acquisition here, whatever. And then I would conclude with my conclusion again, and so I think sales is going to be gangbusters. So what am I doing there? Well, one, I’m making sure I communicate the point that I want you, Curt, to take away from my oration, which is sales are going to be gangbusters, but I’m also at the same time giving you the data.
You need to be critical of that conclusion. So you might reach a different conclusion. This I think is an easy way for entrepreneurs to have their cake and eat it too. I’m going to be persuasive, but I’m also going to be honest. Now the hard part with that is you don’t necessarily have that much time, right? That doesn’t really fit into an elevator pitch. And so you have to be a little bit sensitive as an entrepreneur who wants to be honest to what context you’re in. So maybe if I’m at a cocktail party or in an elevator giving the cliche elevator pitch, I have only time for the positive and not the caveats, not the minutiae, but in contexts where I could reasonably, as an entrepreneur, expect people to make important decisions based on what I’m saying. I really need to fill in that middle portion with data that allows the investor, the customer, or the would be employee to make an informed decision on their own. And we call that the conclusion sandwich. Your data are wrapped in the conclusion twice.
CURT NICKISCH: What other strategies can you employ?
KYLE JENSEN: I think the simplest thing is to choose people. This sounds, it sounds so simple. I feel silly saying it, to choose people who behave in the way that you want yourself to behave. So if you surround yourself with charlatans, with people who are willing to talk out of their rear end, you’re going to end up doing that a lot yourself. But if you surround yourself with people who are honest, who have high moral standards, who are willing to say the difficult thing when it’s difficult, then you’re going to be more apt to do that.
And I think for entrepreneurs, the most important people in that demographic are investors. One of the things that I really lament about entrepreneurship is as an entrepreneur, you only get a few at-bats, right? Maybe you start, I mean, even the best entrepreneurs, just a handful of companies. You raised money a handful of times, you have a handful of acquisitions, but investors, boy, they do that all the time, right? They see so many scenarios and so they are able to pattern match better. And the very best venture capitalists can help you listen to your better angels. The best venture capitalist is going to keep you from drinking your own Kool-Aid and the worst are going to mix it and pour you a glass.
CURT NICKISCH: Does this space allow for people who are, I don’t want to say brutally honest, but are just more equivocal about everything. If you are real, if you really get real in a pitch with a venture capital firm, or you get real with investors or employees, if you’re always kind of talking that way. If that’s even, I don’t know, is that even possible?
KYLE JENSEN: There’s a few things I want to say about that. The first thing is it makes me think about a habit I developed as an entrepreneur that I now teach to entrepreneurs here and-
CURT NICKISCH: To do or not to do?
KYLE JENSEN: To do, that’s the habit. The habit is to say, to be bold when you say, I don’t know. So let’s say Curt, you say to me as an investor, you say, “How do you know that you can reach customers through this channel,” or something like that for my new SAS app or something. And as an entrepreneur, I really liked the following pattern. I might say, “I don’t know, but let me tell you what I think.” Or I would tell you the truth, “I’m not certain, but let me tell you what I think.” And then I’d go into what I think.
The reason I liked that is I’m acknowledging the uncertainty here. I’m showing you that I’m coachable. I’m showing you that I’m honest, I’m showing that I’m candid, but I’m smart enough to have an opinion, to tell you about that opinion and to engage with you in a debate about the matter at hand. So I feel like now, you having asked me that, we should have put that into the paper, but that I think is a very helpful pattern to say, I don’t know, in my mind, engenders trust.
CURT NICKISCH: What’s your hope for the startup world or startup behavior going forward? Just because it is a huge, huge space, it’s getting bigger. My question for you as somebody who was in this world and now studies it, like what’s your hope for how it will change?
KYLE JENSEN: I hope we have more and more entrepreneurship. I mean, we’ve spoken today about kind of one of the dark sides of entrepreneurship, but the larger story is very positive. There are in our society a few people who get a glimpse of the future that the rest of us don’t see, and they decide to work on crazy things that people are skeptical of, or even view with derision. And they work on these things. And for most people, for most of these entrepreneurs, these founders, it doesn’t work out, but for a small few, they changed the world in a way that benefits us all.
You can name many of them who have made the world better places, but for every one of those, there’s thousands who didn’t make it. And so I think as society, even though we kind of think of them sometimes as charlatans or salespersons or whatnot, these entrepreneurs as a population are doing society a tremendous service. And I’m really happy that our modern system in America, at least in much of the world now, is supporting entrepreneurs. Cause we need more of them, especially if we’re going to tackle big challenges that lay before us.
CURT NICKISCH: Kyle, thanks so much for coming on the show to talk about this. It’s really great.
KYLE JENSEN: My great pleasure, Curt, thank you for having me.
CURT NICKISCH: That’s Kyle Jensen, Director of Entrepreneurship and Associate Dean at Yale School of Management. He’s also coauthor of the article, Entrepreneurs and the Truth, which you can find in the July-August, 2021 issue of Harvard Business Review or at HBR.org.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.