An entrepreneur recently told me that his food industry startup was about to close its Series A investment round but would make room for me were I interested in participating.  I was intrigued.  So, I asked for a copy of the term sheet . . . which did not arrive for some days and, only then, in the form of an obviously Googled template in a condition that in earlier times would have been described as “with its ink still wet.”  It was a bad gambit.  Entrepreneurial bluffing at its most transparent.

Should entrepreneurs bluff?

Bluffing in business has been a subject of public debate for many decades.  Is it ethical?  Most online discussions eventually cite a 1968 Harvard Business Review article by Albert Carr.  In it Mr. Carr, sounding remarkably like a present day, mixed martial arts promoter, writes that business is a game, and anything is fair in a game; if one’s bluffing does not violate a law it is permissible, even necessary (for success).  According to Mr. Carr, deceptive practices are always in-season.  Others argue that bluffing is a violation of trust and without trust business relationships will fail.

Who’s to say?

What I can say is that I’ve seen, even participated in, numerous instances of business bluffing.  From plant tours with workers loading inoperative machines, to offices filled with friends and acquaintances posing as workers, to prototypes that are not yet functioning as described.  These were calculated risks taken at specific moments in time under specific organizational circumstances.  The goal of most of these bluffs was to impress customers or to gain more time to achieve promised milestones. Would they have succeeded during a detailed due diligence review?  Unlikely.  Bluffing as part of an effort to obtain funding from banks or investors is not worth the risks.  Which takes me back to my entrepreneurial deceiver….

My advice to him would be to better understand his audience.  Startup investors by law (Rule 501 of Regulation D) and by experience are “sophisticated.”  They’ve seen many, if not hundreds, of sales pitches before.  Most can spot a bluff when it’s first presented; nearly all will spot it before wiring funds.  These individuals and firms are accustomed to discounting projections and assuming that product launch dates will be missed.  So, no, there is nothing immoral about sending them an amateurish term sheet and claiming that multiple professional investors have agreed to its terms.  It’s just insulting.

It’s a bad bluff.


Peter Dragone - Co-founder of Keurig.