Never ask a barber if you need a haircut


Can you handle the truth?

“The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error, if error seduce them. Whoever can supply them with illusions is easily their master”.

Gustave Le Bon.

Since my days as a £2.52 per hour Saturday boy in Woolworths I’ve thought that the ‘mystery shopper’ was a good idea. Those mystery shoppers (whether they existed or not) got to see a truer picture of the Alnwick branch of Woolies and not the picture that staff would show if they somehow knew who the mystery shopper was.

I thought of this when I was at a startup pitching event a few years ago. The organiser told me not to worry, the founders were pulling out all the stops for the investors. Told me, as in me. The organiser did not tell the other investors.

Was this top performance from the founders the truth? Did they pull out all the stops for their customers too? To find out I’ve often employed the mystery shopper approach and pretended to be a random customer. It’s very easy to do and by doing so I get to discover what the company does when it’s not the founder pitching for potential investment money.

The mystery shopper approach may be helpful to you too. As soon as you reveal that you’re an Angel Investor you might not get the truth. Not everyone can do this relatively simple task though — ego gets in the way — people often want others to ‘know who they are’.

Reality distortion field

I get that startup founders often have to distort reality. Steve Jobs was famous for this. So I’m not saying that founder lie per se but you should definitely be aware that they are in ‘sales mode’ when pitching for investment money. Their investment deck has projections in it that won’t come true. Is that a lie? Their recent past has stories of traction and revenue that might be their family and friends buying as a favour. Is that a lie? Their stated mission is to IPO but they’re knackered, under serious pressure and might actually settle for a few mil in six months if it was offered. Is that a lie?

Who are the Stars?

My Rule #11, shared in more detail here, helps me but what truth am I seeking? Here are the top two questions in my mind when mystery shopping:

  1. Why is this person doing what they’re doing? To be unreasonably successful you have to be doing something different — founders need to have the right level of grit and self-awareness and the ones that do are what I call, ‘Star Founders’. Doing something very different is very difficult and the guaranteed result is that at some point the founder will want to (or be under huge pressure to) give up. The strength of the connection between themselves and what they’re doing will keep them going. Put another way, many people say statements such as, “I’m passionate about…”. But is that true? Recently someone told me that they were ‘passionate’ about working in VC. Can’t have been that passionate because a mere eight months later this same person is ‘passionate’ about working for someone else in a FinTech.

  2. Is this, or can this be, a Star Business? I’ve become a total convert to seeking Star Businesses, first shown in BCG’s ‘Growth Share Matrix’ here and expanded upon in Richard Koch’s terrific book, ‘The Star Principle’, here. What’s a Star Business? Essentially if you’ve found the leader in a fast growing niche and that niche can get very big and it can be defended, invest!

To discover true Star Founders and Star Businesses, and to sift out the passion-fakers, takes time and effort. So it helps to have a system.

What’s your system?

It was Warren Buffett who recommending never asking a barber if you need a haircut and his partner, Charlie Munger, said, “Take a simple idea and take it very seriously”. To be a successful Angel Investor you need a simple but serious system; a framework and some principles that will guide you just in case you don’t know the truth yet.

For me, in short, I need to see the founders at work and not just in pitching mode. Meeting thousands of founders at hundreds of meals with 9others since 2011 has certainly helped. By sitting down over dinner and discussing the challenges of business and life I can talk to people and take time to think about what’s important. Some time later I will be able to find out if things said turned out to be true.

I meet founders then I watch and wait. However in William Green’s book, ‘Richer, Wiser, Happier’, here, he notes that Mohnish Pabrai avoids meeting the CEOs of companies that he’s analysing because, “he thinks their talent for selling makes them an unreliable source of information — a policy he cloned from Ben Graham2.

This works for founders too

Back to that pitch event a few years ago… The startups would come in one-by-one to a room full of investors, do their pitch, answer any questions then leave. Startup number six came in, did the pitch and answered the questions posed. His answers were certainly ambitious — huge projections, global domination, lots of money to be made. Some of the investors thought the projections were too ambitious. This is fine, everyone has their opinion.

Once founder six had left the room after their Q&A the organiser of the pitch event turned to the crowd and said, sniggering, “If you think that was bad wait until you hear the next one..!”.

Founder number seven was then called into the room. No matter what that founder said they didn’t stand a chance because they didn’t know the truth about the organiser.

Next: Star Founders

In the next post (for subscribers only) I will share the principles and the framework I came up with to discover ‘Star Founders’ (the ones with grit and the right kind of self-awareness, mentioned above). While it’s not infallible, the framework I devised has certainly helped me back a few stars and avoid many more who were actually just supplying illusions.

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Important: None of these posts are investment advice. If you are thinking about investing you should seek the advice of a suitably qualified independent advisor.



Rule #1: If I meet you for the first time and you are raising investment then I will not invest in this round.


Pabrai makes an exception to this policy when investing in a less developed market such as India, where he tries to judge in person whether he can trust the management.