A recent article from Harvard Business Review describes a phenomenon commonly seen in the tech industry, which the journal names the “deception trap.” The deception trap has appeared in the tech world cyclically, causing unwary investors and stakeholders damage through the loss of their investments and reputations.
While the environment in tech entrepreneurship cultivates the creation of deception traps, there are steps that both founders and stakeholders can take to avoid this pitfall.
The Phenomenon of the Deception Trap
A “deception trap” describes the scenario in which an entrepreneur gains fame and popularity through grandiose promises of industry-altering products and business models but is ultimately unable to deliver on these promises.
In many ways, creative storytelling is an integral factor in the early stages of tech startups. In order to draw stakeholders, founders must make convincing pitches that speak to the potential of their ideas. However, many entrepreneurs struggle to walk the line between convincing rhetoric and deceptive speech.
An article published by the Academy of Management details the phenomenon of the deception trap and the harm it has caused the industry. According to the article, an “expectation gap” in startups—between ambitious expectations and realistic goals—pressures entrepreneurs to engage in deception to maintain stakeholder support.
Setting unrealistic goals can lead to the collapse of the startup. In highly public scenarios, the damaging publicity can go beyond the founder, harming the reputation of stakeholders and others whose names were attached to the project.
Prominent Cases of Deception Traps
The tech industry is no stranger to charismatic founders who garner large publicity but fail to create businesses or products that deliver on their promises. One infamous example is Elizabeth Holmes, the founder of Theranos.
According to Raconteur, Elizabeth Holmes founded Theranos in 2003, when she was only nineteen years old. Despite lacking medical training, Ms. Holmes suggested that she and her team had developed a method to perform diagnostic blood tests from a finger prick, an invention that could have transformed healthcare.
Elizabeth was motivated by a strong desire for success and an ambition to join the short list of tech startup billionaires. However, the product proposed by Theranos proved to be fraudulent. Although it attracted headlines and support, the legacy of the company became one of scandal.
A more recent example of the deception trap is the rise and fall of Sam Bankman-Fried. After launching FTX in 2019 with his former MIT classmate Gary Wang, Bankman-Fried grew the cryptocurrency platform into a company valued at $32 billion, as reported by BBC.
Bankman-Fried garnered a reputation as a tech wunderkind among investors and crypto enthusiasts. However, according to US Attorney Damian Williams of the Southern District of New York, Bankman-Fried was using this time to commit “one of the biggest financial frauds in US history.”
Bankman-Fried was accused of using customer funds for FTX to fuel his risky investments in his startup, Alameda Research, among other allegations. He ultimately pleaded guilty and declared bankruptcy. His rapid fall from grace became another demonstration of the deceptive practices enacted by a charismatic tech entrepreneur.
Avoiding the Deception Trap Pitfall
While the deception trap has become a well-documented occurrence within tech, the pressures faced by start-ups continue to lead ambitious founders into this pitfall, with stakeholders continuing to take the bait. However, there are measures entrepreneurs and investors can take to minimize their risk of falling into a deception trap.
For entrepreneurs, Harvard Business Review advises setting realistic stretch goals and keeping stakeholders informed of the risks and practicalities of scaling down. Transparency is the key to maintaining support without overpromising. Founders should be realistic when creating early prototypes and keep stakeholders updated on milestones.
For stakeholders, it is crucial to be aware of the entrepreneur’s actions and avoid relying solely on second-hand information. New stakeholders should conduct their own research on a startup before proceeding with support.
Overall, remaining aware of the deception trap and understanding that investment always comes with risks—grandiose promises aside—can save tech entrepreneurs and investors from this recurring pitfall.
