The great tragedies are often about lies. Or at least withheld truths, that once revealed mean that nothing can be the same.
This is true across the history of stories, from Oedipus Rex to King Lear to Breaking Bad—and it’s true in Silicon Valley. Nothing was ever the same for Theranos after John Carreyrou’s first bombshell Wall Street Journal story, for FTX after CoinDesk unveiled concerns about the company’s financial structure, or for WeWork after its IPO filing laid bare the company’s deep-rooted issues.
It’s not hard to see how and why Walter White went about hiding his drug kingpin status from his family. But it’s a bit tougher to see how Silicon Valley, a world of tech and numbers, would be fooled by a lie—if only at first glance.
In a world where people sometimes do impossible things, we’re more likely to believe that someone’s figured out how to do something impossible, even if they can’t. In short, Silicon Valley loves a charismatic visionary. Sometimes a little too much, like when that vision outstrips reality. I recently talked about this with Tom Chi, once a founding member of Google X and now founding partner at At One Ventures. Chi thinks that part of the problem is that investors are especially prone to what he calls “charisma distortion.”
“Charisma distortion is when you talk with an investor and they basically say: ‘Oh my God, you’ve got to meet this entrepreneur. They’re amazing. They could sell ice to an Eskimo,'” said Chi. “It means you can make people believe things that aren’t true. And that, to me, is a major risk. It’s not a benefit.”
WeWork founder Adam Neumann, Theranos founder Elizabeth Holmes, and FTX founder Sam Bankman-Fried all fit into this category, said Chi.
“All of them have their own charisma that basically brought these people along,” he told Fortune. “Ah, yes, a $12 billion valuation makes sense, absolutely! A $20 billion valuation makes sense, too! GPs mark things up, and LPs think they’re geniuses.”
And that’s in part what it comes down to, per Chi’s theory—that charisma is good for boosting valuations and, by extension, allowing VCs to mark up their investments.
“Typically, investors talk about charisma as this really big positive,” said Chi. “The reason for that is that it’ll be easier for that founder to raise subsequent rounds. And, if you as an investor just want to see your markups, because they were able to do that next round and the round after that at higher prices, sure. Notch some markups for your LPs, right? But the problem is that, if this is a person who can make you believe something that’s not true—unless you can exit before the point where the thing needs to actually perform—that something that’s not true will come back to bite you.”
Charisma helps offer the illusion of control in an uncertain world, the sense that this person has got it and can even help others connect with something profound, even divine, offering meaning in a life that (I don’t care who you are) is frequently boring. We all at some point have known someone so charismatic that they transform space and make time melt.
And that’s not me, connecting charisma with something ethereal, that was the ancient Greeks—the word charisma is derived from the Greek word “charis,” which means either grace or favor. (If you remember that bit from My Big Fat Greek Wedding, well done.) Ancient Greeks connected charisma and spirituality, expressly believing that charisma was a gift from the gods. And Silicon Valley is nothing if not a place of faith—and narrative. Steve Jobs’s famous “reality distortion field” compelled Apple’s workers to push beyond what they thought was possible and achieve incredible feats.
So, what’s the actual difference between a vision and a lie? Execution, tenses, and definitive statements versus probabilistic ones. I also suspect the most talented liars are usually so good because they start to believe their own lies.
Thomas Edison famously fudged demonstrations while he was working on the incandescent lightbulb. Since in 1878 he couldn’t keep the bulb burning for more than a few minutes at a time, he did brief, one-on-one demos with journalists, tricking them into believing the light bulb worked unequivocally and sustainably—a year before he actually did it. (And at Theranos’s height, Elizabeth Holmes was, roughly speaking, doing something similar with her aptly named Edison devices.)
The next logical question: What next? Exile every charismatic founder?
“Look, charisma distortion doesn’t mean that you have to pass on the deal, but it’s basically a heads up that you need to make sure that you don’t get bamboozled,” said Chi. “Do everything to make sure that what this person is saying is true at a foundational level. Earmark things that might be distorted. The numbers they’re giving you, look at them twice rather than once. The boring person is going to just tell you what the number is…But the charismatic person? They’re probably going to tell you how this all is going to revolutionize everything.”
I pressed Chi further on this, because it’s not like his portfolio is devoid of charisma—for example, he’s among the backers of Colossal Biosciences, the de-extinction company led by Ben Lamm.
“He’s very charismatic, but we had a lot of scientific depth in our diligence,” said Chi. “We got in there and verified that the charismatic things he was saying could be delivered. Since then, he’s been out there delivering. So, I have no qualms about Ben.”
Charisma isn’t substance. It’s almost definitionally cosmetic—which means it’s not without its charms, but also that it can be flimsy and deceptive. Like stage lighting at a concert, it can make people gleam. But if the band isn’t all that good, well, the lights won’t matter for very long.
The truth’s pretty unyielding. Though charisma can buy time, that clock eventually runs out, leaving whatever’s left—which in the most painful cases, is the tragic gap between vision and reality.
See you tomorrow,
Allie Garfinkle
Twitter: @agarfinks
Email: alexandra.garfinkle@fortune.com
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Nina Ajemian curated the deals section of today’s newsletter.
VENTURE DEALS
- Ema, a San Francisco, Calif.-based generative AI platform for enterprises, raised $36 million in a Series A extension. Accel and Section 32 led the round and were joined by SCB 10X, Prosus Ventures, Hitachi Ventures, and others.
- Fabric Cryptography, a San Francisco, Calif.-based hardware-accelerated cryptography company, raised $33 million in Series A funding. Blockchain Capital and 1kx led the round and were joined by Offchain Labs, Polygon, Matter Labs, and others.
- Swiipr Technologies, a London, England-based travel payment platform, raised approximately $7.7 million in funding from Octopus Ventures and TX Ventures.
- DRIFT Energy, a Bath, England-based clean energy-powered sailing vessel company, raised £4.65 million ($6 million) in seed funding. Octopus Ventures led the round and was joined by Blue Action Accelerator.
- Orderly Network, a New York City-based liquidity cloud for Web3 trading, raised $5 million in funding from OKX Ventures, Manifold Trading, Presto Labs, and others.
- Apheros, a Zurich, Switzerland-based thermal management materials producer, raised $1.85 million in pre-seed funding led by Founderful.
PRIVATE EQUITY
- EQT Private Capital Asia agreed to acquire PropertyGuru Group, a Singapore-based property technology company, for $1.1 billion in cash.
- Emerald Bay Risk Solutions, backed by Bain Capital Insurance, acquired Mainsail Insurance Company, a Tarpon Springs, Fla.-based property and casualty insurance coverage provider. Financial terms were not disclosed.
EXITS
- AutoScout24, backed by Hellman & Friedman, agreed to acquire TRADER Corporation, a Toronto, Canada-based online automotive marketplace operator, from Thoma Bravo. Financial terms were not disclosed.
- Shur-Co, a portfolio company of Behrman Capital, acquired US Tarp, a South Haven, Mich.-based truck and trailer tarping systems manufacturer and distributor, from Brighton Partners. Financial terms were not disclosed.
- Warren Equity Partners acquired MoboTrex, a Davenport, Iowa-based traffic control and mobility solutions provider, from Rowe Tomes Advisors. Financial terms were not disclosed.
FUNDS + FUNDS OF FUNDS
- HIPstr, a West Palm Beach, Fla.-based affiliate of HighPost Capital, raised $100 million for its first fund focused on consumer behavior, product, service, media, and technology companies.
PEOPLE
- Freestyle, a San Francisco, Calif.-based venture capital firm, added Maria Palma as a partner. Previously, she was at Kindred Capital.
- GoldenTree, a New York City-based asset management firm, hired Avineet Punhani as principal. Previously, he was at PNC Financial Services.