Pack a suitcase, fly out west, meet with investors – it’s the trip so many young and upcoming founders with sights on Silicon Valley long for. To start the next Apple, Facebook or Google is something they’ve dreamt of for much of their lives.
But for all its opportunities and bright lights, Silicon Valley has some dark clouds hovering above it. In recent years, more tales of startup fraud have surfaced than ever before, leaving many to wonder what truly happens in the land of tech ingenuity. It’s also left many of these individuals questioning why certain scandals are so rampant there.
Silicon Valley – A Land Of Fake Promise?
Before looking into the boom of tech fraud, it’s worth noting that startups and mature enterprises alike have stood at the centre of fraud and corruption scandals for decades. Remember WorldCom and Enron and the many dot.com companies in the late 90s and early 00s? To put it plainly, corporate fraud is nothing new.
But there certainly seems to be a resurgence in startup fraud over the years, and it’s concerning because it’s occurring in tight-knit circles. Both startup founders and venture capitalists alike are committing and supporting these acts.
For example, Zenefits, the HR startup captained by ginger-haired CEO, Peter Conrad, fell from its peak when the company came under fire for violating insurance rules. In early 2016, BuzzFeed published a series of articles about Zenefits’ treacherous behaviours including the use of unlicensed brokers; 83% of the company’s brokers were unlicensed.
Then you have the Theranos case, one of the more high-profile and disturbing scandals to make headlines in recent years. The promising and acclaimed blood-testing startup, led by founder Elizabeth Holmes, came under fire around 2015 when Theranos’ technology was scrutinized for its viability. The mounting investigations eventually led the SEC to charge Holmes with fraud earlier this year and the company will fully dissolve.
And the list continues.
Although startups typically have a very high rate of failure due to natural causes (ie. competition, weak revenue model), many fledgeling upstarts in recent years seem to crash and burn as a result of fraud.
Why Does Startup Fraud Happen?
Well, understandably, entrepreneurs (especially those in the tech world) often have to sell products and services that either don’t exist yet or seem to have little practicality.
In fact, the only individuals who may see the startup’s potential are venture capitalists themselves who are obviously looking for big returns. Understanding this, many founders inadvertently tap into a more delusional side of themselves, engaging in a peacock-like display of their company’s offerings. And this can happen even among the most well-intentioned and morally-sound entrepreneurs.
Chris Bulger, managing director of Bulger Partners, an investment bank which advises tech startups on acquisitions, explained the phenomenon. He summed up the prevailing attitude of many budding entrepreneurs by saying “That’s not ‘My cola tastes better than yours.’ That’s ‘Let me explain to you how the world’s going to be.’”
“Is that person lying when they turn out to be wrong?” Bulger asks.
The question leads to an insight that outsiders may overlook: entrepreneurs have to believe in their product, their abilities and their vision. They can easily overpromise and underdeliver. And if their idea simply can’t live up to the hype, they can come across as fraudsters.
But you may ask, what about other CEOs who have willingly indulged in fraud, lying, and other heinous crimes for the sake of maximizing their profits or crushing their competition?
Trying to decipher why these tech talents would engage in these behaviours would require an intensive psychological assessment. Yet still, a traditional model like the Fraud Triangle can somewhat explain their behaviours.
Pressure To Succeed
Think about a desperate entrepreneur who “needs” their startup idea to succeed. Maybe they’re a college dropout or an ex-employee. Maybe they have no source of income and their emergency funds are dwindling. Maybe their parents, spouse/significant other, friends and colleagues have dismissed them as “living in a fantasy”.
To make things worse, the CEO realizes that the technology he or she has created or is promoting has some concerning flaws or there’s a competitor who can execute the same idea with far fewer hiccups.
Opportunity To Act
Now let’s say the entrepreneur discovers a nifty yet fraudulent trick that could allow his or her idea to bypass safety regulations. If that trick means the difference between VCs pulling out or getting another round of funding worth millions, then the crime seems more tempting. And the icing on the cake is the “perfect crime”, where the founder who is considering a fraudulent act sees how easily they can stay hidden or undetected.
Rationalizing To Follow-Through
Finally, the true antisocial nature of startup fraud emerges afterwards. As deceptive or damaging a crime may be, the founder may come up with justifications to proceed anyway.
They may reason that other successful entrepreneurs have engaged in similar practices and even if they were caught, they had the legal resources to walk away with nothing more than a slap on the wrist. They might even make the matter personal, insisting that they’re committing an act for the sake of their family members’ well-being.
The combination of these three factors can very much explain why founders engage in fraudulent behaviours. Of course, it’s not a justification to accept wrongdoing, but they at least provide some insight into why startup fraud happens.
Lessons To Learn From Startup Fraud
- Always take founders’/entrepreneurs’ claims with a grain of salt
- If working with a startup, set data analytics thresholds to spot red flags of fraud
- If working in a startup, help create an open corporate culture that discourages fraud
- Beware of entrepreneurs and business partners who value success over ethics
- Don’t put Silicon Valley startups on a pedestal (they’re prone to many of the same problems as mature corporations and enterprises)
Silicon Valley – A Land Of Hope & Heartlessness
The purpose of this article wasn’t to bash Silicon Valley startups nor the hopeful founders who want to secure their place there. But it’s important to highlight the dark underbelly of this much-hyped region.
It’s sad to see that such bright and talented young people engage in fraudulent behaviour for a shot of success. Nevertheless, they emphasize the importance of new upstarts creating a strong code of ethics, which are reinforced within the company and by collaborators on the outside as well.