New Delhi: The era of “fake it till you make it” in Silicon Valley is coming to an end as start-up founders face consequences for fraudulent behavior. Not only has funding dried up for cash-burning start-ups over the last year, but fraud is also in the air, as investors scrutinize start-up claims more closely and a tech downturn reveals who has been taking the industry’s “fake it till you make it” ethos too far. High-profile scandals, including Uber, WeWork, and Theranos, have contributed to a feeling that the start-up world’s fast and loose fakery actually has consequences. A chorus of charges, convictions, and sentences has been created that few start-up founders, aside from Elizabeth Holmes, have ever faced criminal charges for pushing the boundaries of business puffery as they disrupt us into the future.
Unethical behavior can largely be overlooked when times are good, as they were for tech start-ups in the 2010s. However, when the easy money dries up, everyone parrots the Warren Buffett proverb about finding out who is swimming naked when the tide goes out. The venture capital investors who backed start-ups were reluctant to pursue legal action when they were duped in the past. That has changed as the unicorns have soared, attracting billions in funding, and as larger, more traditional investors including hedge funds, corporate investors, and mutual funds have entered the investing game.
The Justice Department has also been urging prosecutors to “be bold” in its pursuit of more business frauds, including at private start-ups. Thus, charges for founders of several start-ups and expectations of more to come.
IRL, a messaging app that investors valued at $1 billion, is being investigated by the Securities and Exchange Commission for allegedly misleading investors about how many users it had, according to reporting from The Information. News outlets have also reported unethical behavior at start-ups, including Olive, a $4 billion healthcare software start-up, and Nate, an e-commerce start-up claiming to use artificial intelligence. All of this creates an awkward moment for venture capital investors.
The start-up world celebrates failures, and if you’re not failing, you’re viewed as not taking enough risks. But it is unclear whether that defense will hold as the scandals become more humiliating for everyone involved. Investors are increasingly asking consultants like RHR International to help identify the telltale signs of “Machiavellian narcissists” who are more likely to commit fraud. “They want to tighten up the protocols around how they’re assessing founders,” said Eden Abrahams, a partner at the firm.
It’s essential to note that some of the start-ups mentioned above have disputed and denied the allegations. However, it is clear that the tide is turning in Silicon Valley, and start-up founders who overpromise and underdeliver may find themselves facing criminal charges or ruined reputations. Investors, too, are more vigilant and less likely to overlook questionable practices in the pursuit of the next big thing. While the tech industry will undoubtedly continue to disrupt and innovate, it seems that the days of faking it until you make it are finally over.