Startup founders backed by venture capital commit fraud at higher rates than their non-VC counterparts, and the investors funding them deserve part of the blame, according to two new academic studies published in June. The research arrives as the AI investment boom creates what one author calls exactly the kind of overheated conditions that tempt founders into deception.
Researchers at Imperial College London and France’s Emlyon Business School built a database of tech founders and companies facing civil and criminal securities fraud prosecutions from the SEC and DOJ between 2000 and 2023. Their findings, published online in June, map out how fraud escalates in startup environments — and why investors often enable it.
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Three stages of deception: how founders cross the line
The Imperial College paper, co-authored by Tim Weiss and Nevena Radoynovska, describes what they call “façading” — a three-stage escalation of dishonesty that begins long before any criminal charges are filed.
Surface façading is the first stage, common during early pitching when founders exaggerate how successful their company is or will become. This goes beyond simply pitching an aspirational vision or an astronomical total addressable market — it crosses into outright lying about current traction.
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Reinforced façading follows when founders create fake evidence to back up their initial lies. The paper cites a mobile testing app that manufactured customer contracts and invoices, recorded fake revenue, and used those fabricated documents to convince VCs to invest at a unicorn valuation.
Deep façading is the final stage, where founders extend deception to their technology itself — making their product seem more capable than it is, complete with fake demos. Weiss describes this as building entire “parallel realities” on lies.
Recent high-profile cases illustrate the pattern. Frank’s Charlie Javice, Kalder’s Gökçe Güven, Terraform Labs’ Do Kwon, and GameOn’s Alexander and Valerie Lau Beckman have all faced fraud prosecutions over the past several years.
Investors co-create the fraud they later condemn
Weiss argues that investors are not merely hapless victims of founder deception. “Investors set the high growth expectations,” he told TechCrunch. “Founders then do the necessary and present the numbers and outcomes that investors want to see.”
The research suggests some investors unwittingly “co-create fraud” by demanding impossible performance metrics. “Fraud is much more common and normalized in the startup world than we are ready to admit and accept,” Weiss said.
A separate report from the University of Toronto, also published in June, examined 654 fraud cases against U.S. VC-backed startups from 2000 to 2023. It found fraud remains rare overall, but companies with venture funding were more likely to face fraud charges than those without. Startups launched during overheated markets with weak oversight and poor investor due diligence were 19% more likely to later commit fraud.
The Toronto study also found that startups whose boards were controlled by founders were twice as likely to commit fraud compared to those with investor-controlled or shared-controlled boards. After going public, founder-controlled companies were more likely to face securities class-action lawsuits within two years than private-equity-backed companies.
Silicon Valley’s failure penalty problem
The Toronto report found little evidence that fraud allegations end founders’ careers. “New investors and the broader VC market do not penalize past misconduct,” the report said, “also consistent with the Silicon Valley culture that embraces failure regardless of the cause.”
Weiss notes that founders lack a professional body or association that could govern conduct or define reasonable growth expectations. Public companies face far more scrutiny than private ones, and companies staying private longer only compounds the problem.
He proposes the SEC begin conducting routine formal audits of startups once they hit a large investment threshold, rather than waiting for whistleblower complaints or investor lawsuits to trigger investigations.
What the AI boom means for fraud risk
Weiss says the current frothy AI startup environment mirrors the conditions his research identifies as fraud catalysts: overheated markets, weak oversight, and intense pressure for extreme growth. The pattern echoes earlier boom-bust cycles in crypto and fintech, where ambitious founders faced similar temptations.
The studies suggest investors should bear more accountability for governance failures. “Investors should be held liable for corporate governance failures and violating their fiduciary duties,” Weiss said. He advocates for more research into “entrepreneur-investor dynamics” that could prevent fraud and “balance the overemphasis on the entrepreneur as the sole perpetrator of wrongdoing.”
Until that accountability shift occurs, the lesson for founders remains straightforward: faking it until you make it carries consequences far beyond the initial lie.
