How Investors Can Tell Founder Grit From Good Theater

Will Orde of Passion Capital says he looks for founders with a “serious level of grit & determination” who treat “it can’t be done” as a challenge.

That preference makes sense at seed stage. The product may change repeatedly, the market may move, and the company will collect enough rejection emails to wallpaper a small office. An investor buying into an unfinished company needs some reason to believe its founders will keep operating after the launch flops, the first sales hire quits or a larger competitor ships the same feature.

Grit becomes a dangerous shorthand when investors use persistence, confidence and command of detail as substitutes for verification. A founder can know the pitch cold while withholding facts that would change the investment decision. The sharper question is: How does this person behave when the evidence turns against the plan?

Three investors interviewed by The Recursive supplied both halves of that test. Their comments praised determination and deep immersion, but their strongest red flags concerned bluster, invented numbers and efforts to explain away missed plans. Taken together, those answers describe a diligence framework for separating conviction from polished performance.

Why Investors Reach for Grit

Orde’s preference is understandable because Passion Capital invests at “day zero,” when an operating history may consist of a prototype, customer conversations and an aggressively optimistic spreadsheet. Piotr Bukański of Acurio Ventures offered another observable signal: a founder who can answer a question three layers deeper than expected because they have lived with the problem for months or years.

Raluca Ragab of Eurazeo Growth looks for founders who anticipate investor questions. She accepts that they may lack an answer if they can explain which strategies they have tried and show that they understand the challenge.

These are practical heuristics, not demonstrated predictors of startup returns. The interview does not establish how consistently the investors apply them, how many investments passed or failed their tests, or whether founders displaying these traits outperform comparable founders. Nor does it establish “grit” as a scientifically validated predictor. It records what three investors say they value.

The appeal is still easy to follow. Young companies contain many blank cells, so investors study the person holding the spreadsheet. Unprompted detail suggests prior immersion. Anticipating objections suggests the founder has attacked their own plan before asking someone else to finance it. Admitting an unknown creates short-term discomfort in exchange for credibility.

Each signal has limits. Persistence and rigidity can produce similar performances in a pitch meeting. Deep knowledge can support honest diagnosis, or help someone build a more convincing explanation for bad evidence. Confidence may reflect earned understanding, salesmanship or both. Investors cannot resolve that ambiguity by requesting more charisma.

Test the Update, Not the Performance

The investors’ red flags offer a more concrete approach. Bukański drew the line at fake customers, made-up numbers, unsigned deals presented as signed and accumulations of smaller lies. Orde said founders should admit when they have not considered an issue deeply and return with details, rather than bluster. Ragab rejects attempts to downplay deviations from the plan because they indicate a lack of intellectual honesty.

Those behaviors can be checked against records. An investor can request the customer contract, reconcile claimed revenue with invoices and compare this quarter’s board materials with last quarter’s forecast. The purpose is to see whether the story survives contact with documents.

A missed forecast alone proves little. Startups miss forecasts with the enthusiasm of a puppy missing a thrown ball. Management’s response supplies more information: Does the team label the miss clearly, update its assumptions and explain the consequences to investors and employees?

Founders can structure a pitch around the same test. “We have five paying customers” is a current fact. “We expect 20 by December” is a forecast. “This market could support 2,000” is an aspiration. Putting those claims in separate columns prevents decorative multiplication from wandering into the traction slide wearing a fake moustache.

Theranos is the Stress Test

Theranos shows what can happen when claims about the present borrow the costume of a future vision. The case cannot prove that grit predicts misconduct, and the available government records do not establish that investors selected Elizabeth Holmes through a formal grit assessment. It demonstrates why persistence and conviction cannot carry diligence by themselves.

In March 2018, the Securities and Exchange Commission charged Theranos, Holmes and Ramesh “Sunny” Balwani with raising more than $700 million through what the agency called an elaborate, years-long fraud. The SEC alleged that they made false or misleading statements about the company’s technology, military deployment and financial performance.

The agency said Theranos claimed its products had been deployed by the US Department of Defense in Afghanistan and on medevac helicopters, although the technology had never been deployed there. It also said Theranos claimed it would generate more than $100 million in 2014 revenue while producing a little more than $100,000 in revenue from operations.

Those were claims about deployments and revenue that could be checked outside the founder narrative. Depth of knowledge, obsessive focus and resistance to rejection could not establish whether the Defense Department used the product or whether the revenue existed. Verification could.

Theranos and Holmes settled the SEC charges without admitting or denying the allegations. The criminal case supplies a separate, adjudicated boundary. A federal jury convicted Holmes in January 2022 of one count of conspiracy to defraud investors and three counts of fraud against individual investors, involving wire transfers above $140 million. The jury acquitted her on the patient-related conspiracy count and three patient-fraud counts, while reaching no unanimous verdict on three other investor counts.

The record therefore supports saying Holmes was convicted of investor fraud. It does not support treating every government allegation as separately proven by that verdict.

The historical sequence gives today’s founder heuristics a useful stress test. The SEC’s 2018 action described gaps between the analyzer investors were told about, the machines used for most patient tests and the revenue represented to investors. The 2022 criminal verdict established guilt on investor-fraud counts, and Holmes received a 135-month prison sentence that November. This sequence does not prove Theranos changed venture diligence across the industry. It shows the cost of allowing a story about future capability to replace checks on present capability.

The Cap Table Eventually Keeps Score

The SEC settlement also shows how governance and liquidation preferences can turn misconduct into cap-table consequences. Holmes agreed to surrender voting control, return 18.9 million shares and convert her super-voting Class B shares into Class A shares.

The agency said Theranos’s liquidation preference meant Holmes would receive nothing from an acquisition or liquidation until more than $750 million had gone to defrauded investors and other preferred shareholders, assuming redemption of certain warrants. In plain English, a repayment queue stood ahead of her equity. Only proceeds clearing that preference stack could create value for the shares behind it.

That arrangement came from the Theranos settlement and capital structure, so founders should not treat $750 million as a standard venture term. The broader mechanism is common: preferred shareholders negotiate priority, while common shareholders receive what remains. Employees evaluating options need the preference stack, participation rights and dilution history alongside the headline valuation. A billion-dollar valuation printed on a funding announcement does not explain who gets paid first.

Build a Pitch that Can Be Audited

Theranos is an extreme comparison. A missed startup plan can arise from optimism, weak forecasting or a product customers decline to buy. Treating every forceful founder as a potential fraudster would replace diligence with vibes wearing a police badge.

The narrower lesson fits the investors’ comments. Grit can keep a team working through a difficult but testable problem. Intellectual honesty determines whether that team abandons a false assumption, discloses an ugly number and separates what the product does today from what its founders hope it will do later.

Founders can make that behavior visible. Bring the prior forecast beside the actual result. Label assumptions. Explain which decision changed after a failed experiment. Say “I don’t know,” then specify how and when the team will find out. Investors can reciprocate by rewarding corrections rather than forcing every update through the pitch-deck beautification machine.

A founder’s refusal to take no for an answer may get the meeting. The decision to report what happened after reality said no should determine what happens next.