Both studies appeared in June. One, produced by Imperial College and Emlyon Business School, examines the kinds of dishonest behavior by venture-backed startup founders and how investors contribute. The authors compiled a list of tech founders and startups involved in SEC and DOJ civil or criminal securities fraud actions from 2000 to 2023. Notable convicted founders in recent years include Charlie Javice of Frank, Gökçe Güven of Kalder, Do Kwon of Terraform Labs, and Alexander and Valerie Lau Beckman of GameOn.
Researchers at the University of Toronto examined 654 fraud cases involving venture-backed U.S. startups over a 23-year period ending in 2023. They concluded that fraud is uncommon overall, yet venture-funded companies face fraud charges at a higher rate than non-venture-backed firms. The same researchers also found that startups founded in overheated markets are 19% more likely to commit fraud, and founder-controlled boards double the fraud risk. Tim Weiss, co-author of the Imperial/Emlyon study, said: "Fraud is much more common and normalized in the startup world than we are ready to admit and accept."
Longer stretches of private ownership also play a role, since publicly traded companies attract more scrutiny than private firms. Startups can remain unlisted for years, and the usual checks that come with public markets are absent while founders face pressure to show growth.
Co-authored by Emlyon's Nevena Radoynovska, Weiss's study describes what can happen when founders see a disconnect between investors' growth expectations and actual performance. The authors call the resulting behavior "façading," and it unfolds in three escalating levels: surface, reinforced, and deep. At the surface stage, founders exaggerate how successful the company is or will become.
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This behavior is common early on and goes beyond merely pitching a bold vision or an enormous total addressable market. Reinforced façading means producing fabricated evidence to support the earlier claims. For instance, a mobile testing company invented customer contracts and invoices, booked phony revenue, and used those documents to persuade VCs to invest at a unicorn valuation.
Deep façading stretches the deception into product claims, making technology appear stronger than it truly is, aided by fabricated demonstrations and what Weiss terms "parallel realities."
"The problem here is not just the founders but also those that set and reinforce, at times unreasonable, expectations of high growth," Weiss said. "The current frothy AI startup environment is exactly the kind of conditions that tempt founders into fraud."
Investors are not always blameless victims. Weiss said some financiers inadvertently "co-create fraud" by continuing to support founders - sometimes the same people - who have faced prior fraud accusations, normalizing the behavior. "New investors and the broader VC market do not penalize past misconduct," the University of Toronto report said, adding that this is "also consistent with the Silicon Valley culture that embraces failure regardless of the cause."
The same study also concluded that when VC-backed companies hold IPOs, they are likelier than private-equity-backed IPOs to be hit with securities class-action suits within two years. Weiss added, "Founders 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."
Weiss recommends the SEC regularly investigate and audit startups once they pass a large investment threshold. At present, the agency usually waits for a whistleblower tip, investor lawsuit, or former-employee complaint before acting. The paper also argues investors should face greater accountability for pressing founders to pursue extreme growth. "Investors should be held liable for corporate governance failures and violating their fiduciary duties," he said. Weiss calls for more research into "entrepreneur-investor dynamics" to prevent fraud and "balance the overemphasis on the entrepreneur as the sole perpetrator of wrongdoing."
Fraud, in short, is seldom a one-person act. Unless investors are also held responsible for the growth pressure they apply, entrepreneurs may continue to yield to the impulse to fake their way to success.
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