How to Trick Investors and VCs

Key Highlights

• Three categories of deception: honest accounting shenanigans, operators who don’t understand the basics, and straight-up fraud.
• Sales commissions: under new accounting rules, 90%+ of SaaS sales commissions are capitalized on the balance sheet and expensed over 3–5 years — making efficiency metrics look better in the short run.
• Internal-use software capitalization: when capitalized R&D gets expensed later, it hits COGS (not R&D), hurting gross margins. CFOs minimize capitalization to protect gross margin optics. Some private companies capitalize 15–20% of R&D — “efficiency probably looks great but GAAP gross margins kind of suck.”
• Why VCs are easier to trick than public market investors:
  • Company management controls what gets reported — definitions can be loose and change without public scrutiny
  • Many VCs don’t have a finance background (founders/operators turned VC)
  • Many VCs don’t dig deep — focus is on topline, assuming everything else will work out
• Burn Multiple = Cash Burn / Net New ARR — a key metric that’s easy to game by varying how each component is defined.
• Rule of thumb: “I never really trust the financials of a company before they have a real controller and are getting their financial statements audited — often somewhere before $15M in ARR.”

Connections

• Venture Capital — the investors being deceived; the piece argues VCs are easier to fool than public-market investors because management controls reporting and many lack a finance background.
• Accounting — the “honest accounting shenanigans” at the heart of the article: capitalized sales commissions, internal-use software capitalization, and GAAP gross-margin optics.
• Fraud — the third and most severe of the three deception categories the piece outlines.
• Due Diligence — the article’s claim that many VCs “don’t dig deep,” focusing on topline and assuming the rest works out.
• Metrics — efficiency metrics and the Burn Multiple (Cash Burn / Net New ARR) that get gamed by varying how each component is defined.
• Capital Allocation — the lens through which inflated efficiency metrics distort how investors price and fund startups.