Follow the Money Friday: Is 'Fake It Till You Make It' a Cover for Fraud?

The temptation to "fake it until you make it" is never far from the startup pitch, but new research suggests the line between aspirational vision and criminal securities fraud is thinner than many in the industry care to admit.

As TechCrunch first reported, a June report from the U.K.’s Imperial College and France’s Emlyon Business School mapped out the mechanics of fraud among VC-backed founders. The researchers, including author Tim Weiss and Nevena Radoynovska, built a database of founders who faced DOJ and SEC prosecutions between 2000 and 2023. The list includes high-profile convictions such as Charlie Javice of Frank, Gökçe Güven of Kalder, Do Kwon of Terraform Labs, and Alexander and Valerie Lau Beckman of GameOn.

**The 'Façading' Pipeline**

Weiss describes a three-stage descent into dishonesty termed "façading," which occurs when founders struggle to meet investor expectations:

* **Surface Façading:** Lying about current success during early pitches—going beyond mere aspiration. * **Reinforced Façading:** Creating fake evidence. TechCrunch notes one example of a mobile testing app that fabricated invoices and customer contracts to secure a unicorn valuation. * **Deep Façading:** Constructing "parallel realities," including fake technical demos to make software seem more capable than it actually is.

**The VC Enabler Effect**

While founders pull the trigger, the research suggests investors often load the gun. A separate June report from the University of Toronto (UT) analyzed 654 fraud cases from 2000 to 2023, finding that venture-funded companies were more likely to face fraud charges than those without such funding. Specifically, startups launched during overheated markets with weak due diligence were 19% more likely to later commit fraud.

Weiss points to outsized growth expectations that push founders toward fraud in the first place. He adds that some investors unwittingly "co-create fraud" by continuing to back founders who have previously been accused of fraud, normalizing misconduct to a certain extent. Furthermore, the UT report found that the VC market rarely penalizes past misconduct; founders accused of fraud often successfully raise capital for new ventures, a trend the report attributes to a culture that embraces failure regardless of the cause.

**Governance Gaps**

The data points to a systemic lack of oversight. The UT report found that startups with founder-controlled boards were twice as likely to commit fraud as those with shared or investor-controlled boards. The research also found that VC-backed startups face a greater chance of securities class-action lawsuits within two years of going public than do companies backed by private equity.

**Opinion:** In my view, the current AI gold rush is the perfect storm for this behavior. When the valuation is based on a promise of AGI rather than a P&L, "deep façading" becomes the path of least resistance. If the SEC continues to wait for whistleblowers rather than implementing the formal audits Weiss proposes for companies hitting a large investment threshold, we aren't just seeing a few bad actors—we're seeing a business model based on deception.

Weiss suggests that investors should be held liable for fiduciary duty violations and corporate governance failures to balance the narrative that the entrepreneur is the sole perpetrator.