During their start-up days, many Inc. 500 CEOs tell half-truths to win over customers, while others tell outright lies. A look at the ethical difference between posturing and overt deception.
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Black & White
To grow their Inc. 500 companies, some bootstrappers engaged in an astounding amount of embellishment. And that's no exaggeration
Sometimes when you're backed up against the wall, your instincts take over, and you do what you have to do to survive," says Nick Molina, remembering the early days of his company, Let's Talk Cellular & Wireless (#86). He may not put it this way, but it's clear he's referring to the lies he told to get his business going.
Though it's rarely talked about, if you ask CEOs who started their companies with little cash--on this year's list 43% began with less than $10,000--many of them will readily admit to a fabrication here and there. Not long ago, when Inc. surveyed the CEOs of companies on the 1995 and 1996 Inc. 500 lists who had grown their businesses with little or no capital, 14% said that bootstrapping, by definition, requires "unsavory business practices." For some entrepreneurs, "unsavory" involves stringing out a supplier on a payment or two, but for others it means out-and-out lying.
Of course, when you're first starting a business, all you're really doing is selling people on your idea for what you and your fledgling can do. Customers, vendors, employees, and everyone else you come in contact with want some reassurance that they're involved with a CEO of substance, someone who exudes confidence and gives off a vibe of stability. "When you're small and you're trying to establish larger contracts, obviously you'll attempt to do everything you can to make customers believe you're of size and capable of doing the work," says Neal DeAngelo, cofounder of DeAngelo Brothers (#166, 1996), a landscape-management company in Hazleton, Pa. Still, DeAngelo contends that "it's just not true" that "people who go into business with no money have to lie."
Maybe not, but for some it sure proves useful. When Molina's company was peddling cellular phones and pagers out of a van, he readily admits, falling shy of the truth was practically a standard practice. Take what he had to do to get Let's Talk Cellular space in the all-important Dadeland Mall, in Miami. He was having trouble getting the leasing agent for the mall to take his calls and, more important, to take him seriously. "I called every day and could never get past the secretary," says Molina. "Then one day I called up and she asked me who was calling. I said, 'Tell him this is his doctor and it's a family emergency." The leasing agent took the call, and Molina got the time to sweet-talk him.
That was just the beginning. When the leasing agent told Molina that to be considered, companies needed to be "established," Molina took that to mean he needed to have been in business for at least two years.
"So we manipulated our financials, and we lied our way through that and said, 'Yes, we have," reports Molina, who says he had actually been in business for six months. When the leasing agent told him that his central place of business had to occupy a "substantial" amount of square footage to be considered, Molina says, "we put a wide-angle camera in a corner and filled up the office with friends, family, and employees, and just took pictures so it looked like a very busy office." Then they told the leasing agent that their central office contained more square footage than it actually did. For good measure, "we parked our van in front of a building and took a picture of it and made it sound like that was our building," says Molina.
His tale suggests that a stockpile of untruths can be as handy as a reservoir of cash. But I'm here to tell you that that just isn't true. Oh sure, there's a lot of posturing that goes on when companies get started, but there's a qualitative difference between lying and posturing. It's one thing to send a photo of a busy workplace to a leasing agent hoping that he'll assume it's larger than it is. It's quite another to tell him that you have more square footage than you do.
When you're just starting up, nobody expects you to come out and say, "I don't yet have any track record, so I don't really know if I know how to do anything, let alone what I'm telling you I can do. Besides, I don't really have the employees in place to do the work anyway." Prospective partners of any kind--suppliers, employees, customers--in part judge you on your ability to convince them that you're going to pull off your grandiose plans. So you talk enthusiastically, you bid aggressively, you lease office space that's a tad nicer than what you can really afford. That's posturing. But lying is a different story.
Everybody postures. When we go to buy a car and we tell the salesperson that our first offer of $25,000 is the best offer we're willing to make for that car with the $32,000 sticker price, we're low-balling--if we're smart. And chances are, if the salesperson comes back with a first counteroffer of $30,500 as the best he can do, he's not through bargaining either. We're both posturing to try to get the deal that works. Are we being ruthlessly honest about every detail of what our personal finances will let us afford? No, but then that would be just plain dumb in the context of buying a car.
Anybody who manages a company knows that there are times when saying nothing--thereby letting employees run with their assumptions--is far wiser than disclosing everything. "The one time I decided to just be honest with our employees about our company's precarious financial condition," recalls one former Inc. 500 CEO, "I called all of my people together and said: 'Look, we're handing out payroll checks, but we're broke. If you have to cash your check, I understand. But this is where we are at financially. Could you guys just hold off cashing your checks for a week?' All 40 employees ran to the bank that day." Next time he certainly wouldn't be as truthful, he says.
The fact is that most of us understand that in certain situations posturing is not only appropriate, it's expected. Appreciated, even.
When, for example, Magic Box (#384, 1995), a provider of local- and wide-area networks, had its first brochures designed, it listed multiple departments and capabilities. The brochure, in fact, listed more departments than the company had employees. "We would look like we were a multidepartment company when we were only three or four people at the time," says cofounder Israel Fintz. "We departmentalized everything, and basically, I was doing all of it. But I never lied and said we had seven people when we had just four." Fintz was giving prospective customers wide latitude in assuming what his company was capable of doing. He wasn't giving them misinformation.
Posturing comes in a seemingly infinite number of variations. What follows are some of the classic tactics employed--and freely admitted to--by founders of former Inc. 500 companies.
Customers can't live without us. When Jim Zona, CEO of Pittsburgh Plastics (#400, 1995), was trying to sell his company's shoe-insole inserts to retail outlets, he'd have someone stop in a store and ask if it carried Gel-Soles. Two days later he'd have somebody else stop at the same store. After a few days he'd have a salesperson call on the store to see if it wanted to carry his product. "And they'd say, 'Come on down," recalls Zona. "Once we got in those stores, we'd tell everybody to go there to buy the product."
Sure, we can do that. To get started and bring in much-needed capital, Steve Burkhart, cofounder of Advanced Micro-Electronics (#486, 1995), a Vincennes, Ind., computer-maintenance company, put a bid on the service contract for a local university. The problem was that he didn't have a clue how to price the contract or what would be involved in maintaining all the computers on campus. "We just didn't know a lot of things at that point," says Burkhart. He bid $41,000 with payment due up front. Since everyone else bid more than $100,000, Advanced Micro got the job. The college never asked for references. The college is still a customer, and Burkhart is still bidding on projects he claims to know nothing about. "Right now we're trying to put together a bid for seven GE plants in Mexico. We don't have a clue how to do international business," he says.
I've got a closet full of people. In 1990, when Robert Luster started Luster Construction Management (#407, 1996), a San Francisco-based consulting firm that caters to large construction projects, he couldn't afford to hire any employees. "But," he says, "I had 25 individuals I'd already interviewed that as I found a job I could hire." That's how Luster says he built his business. He had permission from the 25 applicants to use their résumés, which he would bring to prospective construction-project clients. "In professional services," says Luster, "they're not so much interested in the company as in the individual you can deliver."
All that posturing was done with one aim: to paint a picture of a company that was more established than it was. Luster simply did what every good company owner tries to do when starting out on a shoestring--exude confidence, determination, and ruthless optimism. And, yes, often with the goal of trying to get the upper hand in a business relationship. But--and there's a big "but" there--you have to be clear, and make clear to the people with whom you are doing business, that you are not going to do anything to get that upper hand, that you will not cross the line and start lying to your customers. Because once you cross that line, it's difficult to stem the tide of your own lies. It takes a rigorous commitment to keep foremost in your mind the difference between putting on a good face and blatantly lying about your credentials.
Once you cross that line, it's a slippery slide to where you, like Molina, start referring to your most ill-conceived strategies as "actually pretty innovative" rather than recognizing them for what they are. Molina says he developed his "innovative" strategy when his vendors grew tired of late payments from him and required cash on delivery. His technique involved using a check embosser to imprint amounts on a blank check, and typing "certified check" on it so the delivery person would leave the inventory for which he was supposed to get cash or a certified check. That would give Molina a couple of days to actually get some money in the bank. "When the vendor got their check, they'd call and say, 'Hey, this is a regular check,' and we'd say, 'Oh, I'm sorry. Just send it back and we'll send you a cashier's check.' And then they'd say, 'Oh no, we'll just cash this one."
So what's wrong with such lying anyway? Well, we'd like to believe folks like DeAngelo, who contends that "once you get a reputation for being a cheat, a liar, a stealer, you're not going to last very long in any industry." Sadly, that doesn't always seem to be the case.
More likely than not, the real concern is one voiced by the anonymous CEO who asked me, "Aren't you concerned that some people will take some of these ideas and say, 'Hey, why didn't I think of that?" And ultimately, that is the price you pay. Once you're recognized for what you are, then your employees, your customers, and your vendors will think nothing of turning around and lying to you to get what they need. That's the real fear: that the lies we tell will come back to be the lies we're told.
Special-assignment editor Jeffrey L. Seglin is a 1998-99 Visiting Fellow at the Center for the Study of Values in Public Life at Harvard University.
(The following readers' comments appeared in a subsequent issue of Inc.)
Does stretching the truth set a 'dangerous precedent' for a start-up CEO?
The most recent Black and White column ("True Lies", Inc. 500 issue) contended that entrepreneurs who are starting companies are required--expected, even--to stretch certain truths about their fledgling businesses. In an effort to nab prime retail space, Nick Molina, the cofounder of Let's Talk Cellular & Wireless, admitted to manipulating his company's financials and providing photos that made the start-up retailer appear bigger than it was, not to mention posing as a doctor to reach a leasing agent in a prestigious mall. But he didn't really cross the line, argued the column, till he began outright lying, which is something different from the "posturing" entrepreneurs must engage in. Readers seemed to have drawn their own distinctions:
"Posturing, embellishing, or 'selling the sizzle' are as old as business," begins Jim Baxter, owner of Benefit Designs, an employee-benefits company in West Springfield, Mass. "On the other hand, manipulating financials, holding vendor money, bending agreements, and other less-than-honest actions are unacceptable. Those actions ultimately create less trust in the marketplace."
Even within the company, employees will mirror such behavior, with potentially ugly consequences, notes William Bennett, vice-president of marketing at Alliance Underwriters, in Woodstock, Ga. "Beginning early on to stretch the truth or to lie outright sets a dangerous precedent and gives license to other employees around you," he says.
Indeed, the prospect of having to keep so many stories straight should keep any CEO focused on the truth, suggests Eric Barnes, president and general manager at Capital Funds Group, in Berkeley, Calif. "I represent investors who look for established companies needing expansion capital," he explains. "The rule of thumb they have demanded I put out to prospective companies is simple: Tell the truth. All the time. Overstate your negatives. Understate your positives. In this way, nothing ever comes back to haunt you. It's not a bad idea in one's personal life, either."