Analyzing data from Silicon Valley ventures and founders prosecuted for fraud

“Our theoretical framework captures how entrepreneurs facing minor, wide, and extreme expectation-reality gaps engage in evermore sophisticated efforts to detach the venture’s externally projected appearance from its actual operational reality.”

Look, I’m not promoting fraud at all, but having been doing seed raising for the last eight months, there have been many times where I thought the only way to compete was by fudging the numbers (because everyone else is, basically). It’s one of several reasons I left this game and am pursuing non-traditional means of funding now.

A lot of 'numbers' startups cite are basically fake I think. Like if someone says we have this many users as a statement to TechCrunch you have no idea what they are actually calculating

But there is a clear line that gets crossed if you start actually making a database of millions of synthetic users and that's what happened with 'Frank' that sold to JP Morgan and eventually the founder was prosecuted

I'm surprised there was no mention of Elizabeth Holmes. Whenever there is mention of criminal deception of any sort, she's like the poster child for it in my eyes. And I remember her accomplice who instead of admitting he was on the wrong side, kept blaming the journalist who tried to uncover the fraud, instead. He said (something along the lines of) "He (the journalist) kept coming at her.." as if she would've been able to magically solve the problem if she had enough time.

That was all I needed to know about what was wrong about valley culture.

> including the extension of U.S. Securities and Exchange Commission surveillance and whistleblower program, investor due diligence reform, and dedicated entrepreneurship education interventions

Wasn't the SEC essentially gutted to the point it's basically toothless right now?

"Entrepreneurs construct, perform, and protect illusory appearances (façades) that externally project high-growth performance to audiences while masking ventures’ actual underperformance."

This would accurately describe a some of the startups I've worked at. ;-P

This is what Stanford kids do. Read "How to Rule the World: An Education in Power at Stanford University" by the theo guy.

I see the title was changed; I agree with the new title (it’s much clearer and less inflammatory). I tend to use the original title by default, if it fits length requirements.

My thinking is that the post-ZIRP era, with its more limited funding, will probably require a lot more honesty, transparency, and vetting from founders. “Casting a wide net” makes more sense when funding comes cheap and easy.

I once worked at a startup that did this. They raised over $1m+ on a slideshow and a fake mockup while convincing investors they had a working product. This company was eventually acquired and swallowed up. From what I understand it didn't make it to the market they intended.

I wonder how it compares to small business fraud. I know of multiple frauds in non venture backed ecom and real estate development. In some cases the person involved seems to be a professional fraudster, having had no real employment outside of fraudulent businesses.

I think this is accurate and a reflection of the pathological insecurity that leads someone to want to start a startup.

"Facading" is a term that just uses more letters to call someone a liar or thief.

There's no need to beat around any bushes.

When your business culture rewards lying or theft then you have a real ethical problem that signals the need for strong regulatory reform and severe criminal penalties. These sanctions should be retroactively applied for all those who assumed they would be able to dance away scot-free. Asset confiscation, prison time, large financial fines should be distributed to all those liars and thieves, especially the ones who constructed the systems that used algorithmic adjustments to help destroy society or create surveillance operations that could be used against ordinary citizens in violation of privacy.

The more you force unrealistic expectations of exponential growth, the more founders engage in 'façading.' This feels a lot like multi-level marketing and a game of hot potato—keeping the early investors' returns safe by bringing in new capital.

The paper's concept of 'deep façading' follows the same pattern. When a product fails to generate sustainable value or revenue in the market, founders create fake metrics to protect the book returns of early investors and attract the next round of funding. Instead of being driven by real customer value, the company's valuation is inflated by the next investor's money—creating a multi-level pyramid.

The successful hot potato is WeWork, handed off to SoftBank and public market retail investors. The failed one is Theranos.

FWIW, I left a VC backed startup where I was an equal co-founder because my co-founder was committing securities fraud (blatant lying about customers and traction in investor update emails, amongst other things).

I presented all the evidence to the investors when I was leaving, and I was told that they'd rather let the startup die a natural death than suffer the "reputational harm" that'd come from going after the charlatan. ¯\_(ツ)_/¯

I'm thrilled someone has attempted to quantify the lies, fraud and deception that has been the norm here in Silicon Valley for decades. I've worked at startups, have friends who are entrepreneurs, everyone in my family has worked at startups, and there's no question that lying and deception are normal and expected here.

If this was applied to all of commercial organizations equivalently, the entirety of our society would probably grind to a halt

Isn't venture capital just playing along too, though? They also benefit from all the myth making and hype storms, even if they are technically getting defrauded while funding it.

They could actually audit the companies they invest in, and go after the frauds. The Nikola example is a great one--if anyone had looked carefully behind the marketing the fraud should have been obvious. But by and large they don't, really. Seems to be a tacit endorsement of the behavior.

façading has made Elon Musk very rich.

Fine line between articulating a vision well or marketing vs just lying.

I wonder how this compares to other fields. Whenever you have a market like this, there's a giant incentive for fraud, and the more people cheat the stronger the incentive gets to the point that you lose if you don't cheat.

That being said -- for my own co. I did not fudge numbers at all. In fact I understated them sometimes. We raised less money than our competitors, which probably hurt us, but we also got very high quality investors that are not a giant pain to work with and are not idiots. Those investors in turn introduced me to others and to our current CEO (hired to replace myself, was my idea in part) and they're all high quality.

I'll take it. Working with shitty people sucks, and my guess is the people you get when you bullshit are themselves bullshitters and assholes.

I could have bullshitted like mad and raised stupid money during the COVID era fund raising bubble. I'd be left with shitty people though, and a waterfall you'd never clear, so you'd never see an exit unless you went insanely vertical.

The last part is a nuance a lot of people don't get: raise too much and/or on too high of a valuation and you will never clear the waterfall unless you get an 0.000001% super-unicorn outlier growth curve. Every $1M in valuation means you have to go into more and more rarefied air to see a good exit. At that point you're basically gambling. Gambling is a tax on people who can't do math.

The post-ZIRP observation resonates. Building a bootstrapped SaaS in Europe right now, I've noticed investors increasingly ask for verified metrics not just screenshots, but API-connected dashboards. It's almost like the market is self-correcting by making due diligence cheaper to do properly.

The real problem with façading is the selection effect downstream: founders who inflate metrics attract investors who expect inflation, creating a system where honesty becomes a competitive disadvantage. You end up filtering out exactly the people you'd want on your cap table.

Business as usual for the west.

Talk about every other countries ethics while being the number one thief through narrative capture