Nothing ventured, nothing gained

Founders court investors in order to raise capital. Meanwhile, investors are looking for opportunities to generate returns over and above traditional methods such as the stock market or even high-interest bank accounts. It’s a system that is designed to serve both parties, and for the most part it works.

When my company secured its first round of investor capital, I felt a mix of pride and pressure. Over time, I’ve justified my investor’s faith in our company in a way that I believe represents a realistic ROI based on a business model with strong foundations.

Fundraising is exploding and valuations are rocketing. According to Crunchbase, global venture capital funding shattered records in the first half of 2021 as more than $288 billion was invested worldwide.

Crunchbase numbers show that global venture funding in the first half of 2021 surged 61% compared to the prior peak of $179 billion in the second half of 2020. That’s up 95% compared with the first half of 2020, when venture investors deployed $148 billion globally.

But with valuations going through the roof, this can create a self-fulfilling prophecy of high-attrition for a humble startup. We are living in a time where we see more unicorn companies than ever before.

By mid-2021, 250 companies joined the Crunchbase Unicorn Board, compared to 161 new unicorns for the whole of 2020. The board now counts 879 private companies that have altogether raised $564 billion. So is it any surprise that sometimes hyperbole and overstating claims – being stingy with the truth – can seem to be a prerequisite for founders?

The ‘fake it until you make it’ culture has long been accepted as par for the course by those pushing for fast growth. The external perception of a new business is of course important and telling a compelling story is a significant step towards investment. However, with reports of predatory companies using tactics that are far from ethical to entice investors, where is the line drawn between transparency and embellishing the truth?

Earlier this month, famous founder Elizabeth Holmes was found guilty of fraud charges. Holmes spent over a decade controlling every piece of information about her medical tech company Theranos, accepting investors’ cash but never revealing how Theranos’ technology worked. Holmes attracted immense investment and worldwide acclaim when she claimed that her technology could run blood tests from a finger prick of blood. At the height of her success, Theranos was valued at a staggering $9bn and she was compared to Steve Jobs. When journalists started asking tough questions and investigating the company, the illusion swiftly collapsed.

During her reign, it is reported that she operated in stealth mode, had staff tracked, visitors sign non-disclosure agreements; in court she even admitted hiding the use of modified commercial devices from investors. Holmes’ prosecutors claim she chose fraud over business failure.

I believe that the actions of the founder form the building blocks of employee behaviour. Unethical leaders pave the way for a toxic work culture that fuels corruption and lies. Whether it is a lies about the effectiveness of a product or controlling information to cover up discrepancies, the ways in which a founder communicates information to the workforce and potential investors is key to a strong ethical culture within an organisation.

But are venture capitalists creating a culture of expectation or are startups trying too hard to live up to unrealistic hype? Some might see startups – especially those in technology – as a ‘get rich quick’ opportunity but these expectations put intense pressure on a small business trying to succeed in a saturated world. It creates an environment where founders feel they need to practice information control in a way that may not be ethically sound. What is required is a transparent approach toward information that is responsible and realistic for all those involved.

At Procurified, our strategy is to raise enough to get us to the next stage of growth, at a fair valuation, with rational investors. We have seen huge companies in our sector collapse. Katerra most famously filed for bankruptcy after burning through more than $US2bn of funding. SoftBank invested $2 billion in the company between 2018 and 2020. Dividing that $2 billion over the company’s six years of operation equates to spending almost $1 million a day.

But the outlook and predictions for our industry remain very optimistic, with predicted growth despite two years of Covid-19. Being rooted in virtual technology, our bid management platform counts itself amongst the fortunate business models to have thrived during the pandemic.

Pitching a business transparently and ethically and finding investors who will help to achieve unicorn status is clearly a better outcome than deceit, epic failure and a wrecked reputation. A startup with a strong ethical foundation is one that has a higher chance of long-term survival and growth. But is it the low survival rate of startups that causes founders to embellish facts and figures or does the blame fall to investors placing such pressure on startups that they have no choice but to fulfill the hype with bold claims? Surely a landscape of consistent, sustainable and realistically scaled businesses is ultimately better for everyone than a battleground of failed companies with one headline-grabbing ‘Amazon’ dominating the sector and ultimately stifling competition, innovation and variety?

Rupert Tait is the co-founder of Procurified, a cloud-based platform that instantly connects contractors and suppliers in the construction industry.