VC-backed startups commit more fraud, and researchers think they know why

A new report from the U.K.’s Imperial College and France’s Emlyon Business School has mapped out the ways Silicon Valley’s VC-backed founders commit fraud — and the role investors play.

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.

Some famous cases of tech founders being convicted of fraud over the past few years include Frank’s Charlie Javice , Kalder’s Gökçe Güven , Terraform Labs’ Do Kwon , and GameOn’s Alexander and Valerie Lau Beckman.

All over X, the tech industry’s social network of choice, the topic of fraud and its gentler word “scam” are discussed, as people debate the limits of ambition and success. “Fraud is much more common and normalized in the startup world than we are ready to admit and accept,” Tim Weiss, one of the authors of the report, told TechCrunch.

He pointed to another report from the University of Toronto (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’t take venture funding. It found that startups launched during overheated markets with weak oversight and investor due diligence are 19% more likely to later commit fraud.

“The problem here is not just the founders but also those that set and reinforce, at times unreasonable, expectations of high growth,” Weiss said. He added that the current frothy AI startup environment is exactly the kind of conditions that tempt founders into fraud.

Weiss’ 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 “façading,”as the paper calls it, in three increasingly dishonest stages: surface, reinforced, and deep.

Surface façading 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’s a level of dishonesty higher than just pitching an aspirational vision or an astronomical total addressable market.

After the surface façade, the founder may move into “reinforced façading,” according to the paper, which involves creating fake evidence to back up lies told.