How to Raise Money Without Lying Entrepreneurs often overstate their early "success" in order to get investors to buy in. Here's how to avoid this fatal strategy.

By Alex Gold

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"We have grown 2,600 percent in three schools over the past four months," a breathless and incredibly young founder boasted to me as he was pitching his new company: a mobile app for school scheduling.

Related: Should Entrepreneurs Lie? It's a Tricky Question.

Though this entrepreneur wannabee was so confident about his app that he was ready to drop out of the prestigious Wharton School of Business, what he didn't count on was what a quick search of his app's history would reveal.

In fact, I conducted such a search -- on the App Store, no less. And what a few clicks on my part yielded was a simple fact: This young man was just combining many mobile apps, launched three years prior, into one brand. And, yikes, he was passing it off as something completely new.

"Love this concept and the business," I told him. "And yet, I see on the App Store that you have a number of outstanding apps that are similar to this concept, and in fact contain the same UI/UX -- but only with different colors."

With only silence emanating from the other end of the phone, our conversation came to a quick end.

You would think that after the thriller-esque story of Elizabeth Holmes and Theranos or even after this young founder's notable indiscretion, that every entrepreneur would learn one simple lesson: Don't lie.

And, more than that: Don't overstate what isn't there. Don't ever do this to investors. And especially don't do this when pitching your business.

Yet, time and time again, I've been confronted by investors who complain about being patently lied to about everything from founders' full-time commitment and product traction to the make -up of their financing rounds.

Shooting themselves in the foot

Aside from the obvious legal implications of this behavior, many founders don't realize that in stretching the truth, they are often shooting themselves in the foot. They don't realize that the fine line between being passionate about selling their business and outright fiction often results in their holding unrealistic expectations about whom they can recruit, or growth that they can't achieve.

Related: It's Time to Talk About Startup Scam Artists

If you yourself are a founder, here's how to avoid this type of behavior when you deal with two topics that are both critical to and common in fund-raising: product traction and the presence of certain investors in your round.

Telling the truth about traction and user growth

One of the most prominent ways in which entrepreneurs creatively "position" the truth relates to user traction and growth. With an investor reviewing on average close to 3,000 opportunities a year, he or she is going to pay particular attention to traction and growth. No one sums up this maxim better than Y Combinator co-founder Paul Graham, who said: "Startups equal growth."

Yet in reality, startups often don't equal growth. For one reason or another, founders may not immediately capture consumer attention, may have issues with marketing and acquisition or may have to pivot before finding their groove.

But that doesn't stop the most enterprising and daringly ambitious founders from overstating their traction in order to raise money. From disguising "bookings" as realized revenue, to pooling users from a number of different apps into one, founders will try anything.

Yet if your particular startup doesn't have enough traction to capture investors' attention, the best strategy, aside from telling the truth, should be to focus on the story you tell and how your concept will capture and own its respective market.

And the best way to do this is to focus on the scale of your Total Addressable Market, or TAM. In fact, by focusing on the potential TAM of their startups, founders can shift the conversation to more of what's possible, which is often limitless, rather than actual early results.

Another strategy is to focus on future growth strategy and projections rather than actuals. Resources like the Entrepreneurs Organization or the Young Entrepreneurs' Council provide founders with the easiest means to do this. The point of these suggestions? To provide a concrete framework of predictability around what is often the wild west of the startup universe.

Investors call one another for references.

When raising capital, eager founders may state that certain investors are "in" a particular round, when in fact the latter may just still be considering an investment.

In this respect, founders in many ways are responding to investor "herd dynamics" in that the presence of one investor or fund becomes an immediate incentive for another to invest. Founders think they can make up the difference and close as many investors as possible so that what may have started out as a slight misstatement is eventually obviated in a short period of time.

There's a warning here, however: Founders may not realize that the investor community, in Silicon Valley and beyond, is extremely small. Investors often call and reference check one other on deals both to assess value and claim bragging rights. After all, the best deals are often competitive.

So, rather than employing definitive language saying an investor is "in" a round, founders should communicate that a particular investor has a clear and principled commitment to funding a startup but has not made a firm commitment yet.

Terms like "soft circled" and "committed in principle" indicate that particular investors are very close to a commitment, yet have not formally written a check. Even better, some founders might offer to connect prospective investors together in order to fast-track due diligence.

Yet another strategy is to pivot the question right back to the investor: Ask why he or she cares who else is committed. Investors should be willing to capitalize a business because they believe in the team, the product and the market potential. Not what other "name brand" investors may be in the round.

When founders pivot the conversation in this direction, investors will usually focus once again on the business rather than name recognition.

Doing well by doing the right thing

If you're a founder: Pushing the limits when you're raising capital, especially when it comes to traction and investor participation, only establishes a foundation for failure. By setting unrealistic expectations, often in the most desperate hours of fund-raising, founders are only hurting themselves.

Related: 8 Ways to Win Over Investors for Your Startup

Conversely, by being more strategic and tactful in their pitch, founders can achieve the same effect and close the investors they want.

Wavy Line
Alex Gold

Entrepreneur Leadership Network Contributor

Founder & General Partner, Harvest Venture Partners

Alex Gold is the founder and general partner of Harvest Venture Partners, an early-stage venture firm building breakthrough financial-technology businesses. Previously, Gold was the co-founder and chief marketing officer at Myia Health and Venture Partner at BCG Digital Ventures.

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