VC-backed startups commit more fraud, and researchers think they know why  

Core Impact Points

• VC-backed startups in Silicon Valley are more likely to commit fraud, with 19% of companies with venture funding facing fraud charges compared to those without.
• Researchers attribute the increased fraud to the pressure of meeting high growth expectations set by investors, which can lead to 'façading' or dishonest behavior by founders.
• Investors may unwittingly 'co-create fraud' by setting impossible performance expectations, and some may even be held liable for corporate governance failures and violating their fiduciary duties.
• Startups with founder-controlled boards are twice as likely to commit fraud compared to those with investor-controlled or shared-controlled boards.
• The study suggests that the SEC should start investigating and conducting formal audits on startups routinely after they hit a large 'investment threshold'.
• The report highlights the need for more research into 'entrepreneur-investor dynamics' to prevent fraud and balance the overemphasis on the entrepreneur as the sole perpetrator of wrongdoing.