{"id":1122748,"date":"2026-07-31T20:05:11","date_gmt":"2026-07-31T20:05:11","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/1122748\/"},"modified":"2026-07-31T20:05:11","modified_gmt":"2026-07-31T20:05:11","slug":"vc-backed-startups-commit-more-fraud-and-researchers-think-they-know-why","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/1122748\/","title":{"rendered":"VC-backed startups commit more\u00a0fraud,\u00a0and researchers think they know why\u00a0\u00a0"},"content":{"rendered":"

A new report from the U.K.\u2019s Imperial College and France\u2019s Emlyon Business School has mapped out the ways Silicon Valley\u2019s VC-backed founders<\/a> commit fraud \u2014 and the role investors play.<\/p>\n

For the report, published online in June, researchers built a database of tech founders and companies who faced civil and criminal securities fraud prosecutions from the SEC and DOJ between 2000 and 2023.\u00a0<\/p>\n

Some famous cases of tech founders being convicted of fraud over the past few years include Frank\u2019s Charlie Javice<\/a>, Kalder\u2019s G\u00f6k\u00e7e G\u00fcven<\/a>, Terraform Labs\u2019 Do Kwon<\/a>, and GameOn\u2019s Alexander and Valerie Lau Beckman.<\/a><\/p>\n

All over X, the tech industry\u2019s social network of choice, the topic of fraud and its gentler word \u201cscam\u201d<\/a> are discussed, as people debate the limits of ambition and success.<\/a> \u201cFraud is much more common and normalized in the startup world than we are ready to admit and accept,\u201d Tim Weiss, one of the authors of the report, told TechCrunch. <\/p>\n

He pointed to another report from the University of Toronto<\/a> (UT) also published in June that looked at 654 fraud cases against U.S. VC-backed startups from 2000 to 2023. It found that fraud is rare overall, but companies with venture funding were more likely to face fraud charges compared to companies that didn\u2019t take venture funding.\u00a0It found that startups launched during overheated markets with weak oversight and investor due diligence are 19% more likely to later commit fraud.\u00a0<\/p>\n

\u201cThe problem here is not just the founders but also those that set and reinforce, at times unreasonable, expectations of high growth,\u201d Weiss said. He added that the current frothy AI startup environment is exactly the kind of conditions that tempt founders into fraud.<\/p>\n

Weiss\u2019 paper, co-authored with Emlyon researcher Nevena Radoynovska, discusses what may happen when founders face a gap between how investors want their startups to perform and how they are actually performing. They may turn to \u201cfa\u00e7ading,\u201das the paper calls it, in three increasingly dishonest stages: surface, reinforced, and deep. \u00a0<\/p>\n

Surface fa\u00e7ading is when founders lie about how successful the company is or is becoming, when that is far from the case. It is common during the early stages of a company when they are pitching their vision to investors. It\u2019s a level of dishonesty higher than just pitching an aspirational vision or an astronomical total addressable market.<\/p>\n

After the surface fa\u00e7ade, the founder may move into \u201creinforced fa\u00e7ading,\u201d according to the paper, which involves creating fake evidence to back up lies told. <\/p>\n

The paper gave\u00a0the\u00a0example of a mobile testing app that created fake customer contracts and invoices, recorded fake revenue, and used those fake documents to convince VCs to back it at a unicorn valuation.<\/p>\n

From there founders may enter \u201cdeep fa\u00e7ading,\u201d where they extend their lies to areas like making their tech seem more capable than it is, complete with fake demos. This involves entire \u201cparallel realities\u201d built on lies, Weiss said.<\/p>\n

But investors aren\u2019t always hapless victims, the researchers found. Some of them unwittingly \u201cco-create fraud,\u201d Weiss said, by setting impossible performance expectations<\/a>.\u00a0<\/p>\n

\u201cInvestors set the high growth expectations,\u201d Weiss continued. \u201cFounders then do the necessary and present the numbers and outcomes that investors want to see.\u201d\u00a0<\/p>\n

Investors may play another role: The UT report suggests that being accused of fraud is hardly career-ending in Silicon Valley. It found little evidence that alleged fraud prevents founders from raising funding for new startups \u2014 even if those fraud cases received major media attention. \u00a0<\/p>\n

\u201cNew investors and the broader VC market do not penalize past misconduct,\u201d the UT report said, which is \u201calso consistent with the Silicon Valley culture that embraces failure regardless of the cause.\u201d \u00a0<\/p>\n

The study also found that startups whose boards were controlled by the founders were twice as likely to commit fraud compared to those with investor-controlled or shared-controlled boards. \u00a0<\/p>\n

Even more interesting, it reports that after such startups go public, when they maintain founder control, they are more likely to face securities class-action lawsuits within two years than PE-backed companies that go public.<\/p>\n

The fact that companies are staying private longer also contributes. Public companies undergo more scrutiny than private ones. \u201cFounders do not have a professional body or association that could govern or enforce rules of entrepreneurial and investor conduct on how to be a good founder and what reasonable growth expectations are,\u201d Weiss said.\u00a0<\/p>\n

Weiss proposes that the SEC should start investigating and conducting formal audits on startups routinely after they hit a large \u201cinvestment threshold,\u201d he says. Currently, the SEC typically waits for something like a whistleblower complaint or a lawsuit from investors or former employees to trigger an investigation.<\/p>\n

Weiss\u2019 paper suggests that investors should take more accountability when pushing founders to hit extreme growth metrics.<\/p>\n

\u201cInvestors should be held liable for corporate governance failures and violating their fiduciary duties,\u201d he said. He wants to see more research into \u201centrepreneur-investor dynamics\u201d that could help prevent fraud and also \u201cbalance the overemphasis on the entrepreneur as the sole perpetrator of wrongdoing.\u201d<\/p>\n

But until the day when investors may be willing to shoulder some blame, it is important for founders not to succumb to the temptation of faking it until they make it.<\/p>\n

When you purchase through links in our articles, we may earn a small commission<\/a>. This doesn\u2019t affect our editorial independence.<\/p>\n","protected":false},"excerpt":{"rendered":"A new report from the U.K.\u2019s Imperial College and France\u2019s Emlyon Business School has mapped out the ways…\n","protected":false},"author":2,"featured_media":1122749,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[3094],"tags":[51,3134,349,16,15],"class_list":["post-1122748","post","type-post","status-publish","format-standard","has-post-thumbnail","category-entrepreneurship","tag-business","tag-entrepreneurship","tag-fraud","tag-uk","tag-united-kingdom"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/117016391307843807","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/1122748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=1122748"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/1122748\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/1122749"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=1122748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=1122748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=1122748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}