Management may start by exaggerating to attract investors, then find itself forced to continue to protect the valuation created by that exaggeration.

The story of the shopping app Phia brought this question back to the forefront. The app uses artificial intelligence to compare prices and find discounts, generating part of its revenue from commissions linked to purchases.

But tests showed that some purchases were attributed to the app, even though the user did not reach the store through it or rely on it to make the purchase decision. The user might enter the store on their own, select the product, and then proceed to checkout, while the Phia extension places its referral code in the background, making the app appear to have contributed to completing the transaction.

Thus, sales that the app did not actually generate could be attributed to it, and it might receive a commission based on them. The company said that what happened resulted from a technical glitch in calculating referrals for some users, and that it fixed it after discovery. Therefore, the incident alone is not enough to say that the founders intentionally misled investors.

But the story raises a bigger question beyond the app itself: What happens when a company's value is built on numbers that do not reflect the value it actually created?

The problem is not limited to apps or startups. A listed company trying to protect its share price, or a private company seeking a higher valuation, can face it. The further the results deviate from expectations, the greater the pressure on management to maintain the image they presented to investors.

Exaggeration does not always start with obvious falsification of numbers; it may come in the form of seemingly limited decisions, such as choosing a metric that shows better performance, recognizing revenue early, or deferring some expenses. But these decisions raise investor expectations and put management under greater pressure to meet them in subsequent periods.

Luckin Coffee provides a clear example. The company was founded in China and positioned itself as a fast-growing competitor to major coffee brands. As its sales figures rose, its story became more attractive to investors.

During 2019 and 2020, the U.S. Securities and Exchange Commission said the company fabricated retail sales exceeding $300 million to make its revenue, growth, and profitability look better than reality. In the same period, it raised more than $864 million from equity and debt investors.

The numbers did not only improve the picture of results; they helped the company convince investors to inject more funds. When the practices were exposed, Luckin agreed in 2020 to pay a $180 million fine to settle the case, without admitting or denying the allegations.

The motivation in such cases is not limited to raising new investment. Management may raise the growth bar to secure funding or increase the company's valuation, then find itself required to prove the same story in every earnings report or new funding round.

When performance slows down, admitting the decline is no longer just an announcement of weak results. It may threaten the stock price, weaken lender confidence, and affect management compensation and the valuation the company previously attained.

Over time, exaggeration shifts from a means to attract investors to a means of protecting the valuation it helped create. The longer a company continues to present a better picture than reality, the higher the cost of admitting the truth, until management becomes preoccupied with defending the narrative instead of addressing the flaws within the company.

It is natural for management to be optimistic about their company's future and set ambitious growth targets. But the problem begins when expectations transform from a goal the company strives to achieve into a story it cannot back away from, even when results stop supporting it. Therefore, it is not enough for investors to look at revenue size or growth rate; they must understand how these numbers were achieved and whether they show genuine sustainable activity or just a better picture of the company.

A company may be able to protect its story for a while, but it cannot make the narrative a permanent substitute for performance. The most dangerous stage it reaches is when, in management's view, the collapse of the story becomes more serious than the persistence of the flaw itself.

Writer and analyst in finance and business