I was reading this Fortune’s article about the growing list of startup scandals, and I was surprised to learn some facts about the scandalous startups.
I knew about the Theranos’ involvement in selling tests which were actually rarely work. I also knew about Jessica Alba’s The Honest Company, which allegedly “mislabel” its products. But reading the Fortune article, I was presented with a host of startups that are either unethical or downright scammer.
What’s going on?
In the business world, it seems that there is no difference whether you’re an exciting, cutting-edge tech startup or an old, boring decades-old company – you want to appear successful in the eyes of the world – your investors, customers, employees, regulators, etc. In the process, some companies want to take shortcuts through grey area business practices and shortcuts.
“Fake it till you make it” seems to be the naughty startup founders’ motto. Founders use a range of questionable methods to either get funding or raise their startup’s valuation – or both.
Here are some of the things they actually do:
- They use certain accounting strategies and tactics to either make their companies to appear more attractive to investors or to reduce taxes.
- They release fake growth data to make them appear promising.
- They publish fake product presentation to make customers and investors believe in them.
- They have their employees and partners to buy their own products, so that those appear popular.
The list can go on and on. As you can see, startups are no different from other types of organizations in the business world – some just love to play dirty.
How many of them involved?
I don’t know. However, Jakub Kostecki, founder of StartupFactCheck, a firm that helps investors check on startups’ due diligence, said that of 150 early-stage startups investigated, three-quarters – or about 110+ of them – are pitching investors with misleading or incomplete information.
There are, of course, many more startups involved in such fraud – including those that are still under the radar.
Why founders are engaging in such unethical activities? Why won’t they just believe in their own product and let quality speaks for itself?
It seems that the main reason startup founders are dwelling in the gray area is due to the pressure of investors and their peers.
Founders are overwhelmed by the anxiety caused by VC’s expectations for hyper-growth and instant results and the intense competition. Such pressure cause founders to bun investors’ money – often faster than they should.
Another thing is the need for social recognition – which will return in the form of startup valuation. The media wants to cover promising startups – which is good for branding. The consumers’ fav startups that change the world fast. – so some founders want to make that happen by breaking the rules, including laws and regulations.
Making an appeal
Of course, the fraudulent claims and all shouldn’t make us generalize things, assuming that the startup world is rigged and full of fraudsters. There are way many more startups that aren’t going to the dark side to achieve success.
Naval Ravikant, AngelList’s Founder/CEO, claimed that the startup investing platform had facilitated 1,100 investments without any incidents.
Nevertheless, identifying potential stumbling blocks and do some measures to avoid those is a good way to improve your success rate, whether you are a startup founder or an investor.
Startup life is an exciting one, but it often comes with considerable pressure. No wonder some founders feel the need to buy fast cars and go skiing in the Alps with their investors’ money – they probably need more escapism than the rest.
Not trying to be an a**hole, but I think founders need to use investors’ money where it should be used – otherwise, it’s better to self-fund, or even bootstrap their startups.
So, what can we takeaway from the whole situation? Here are four that I can think of:
1. Entrepreneurship is hard
If you don’t have the guts to take the long path to success, then you might not be suitable to be one. There will be many sleepless nights; you’ll worry every single day; there are 1,001 things going on in your head, and another 1,001 things to do for your startup. It’s not for the faint-hearted.
2. We need more ethical founders
Investors somewhat know that investing in startups is a bet. Most will die, and I’m not sure that doing stupid things will improve the startup success rate. So, be ethical and make sure that you deserve success.
3. You’ll lose trust, eventually…
…if you keep on tricking your potential investors, customers, and employees. When those happen on a massive scale, entrepreneurship will return to its place decades ago – a place for losers who couldn’t get proper jobs.
4. Be skeptical of what you read from the media
Don’t invest based on what you read from the media. Some of them are fans of startups, and they tend to cover interesting, rapid-growing startups, which historically proven to be overvalued, over-hyped – not all of them, but there are too many to ignore. Instead, you should invest the Warren Buffett way – discover the real value of the startups and invest on them. Unless, of course, you’re a VC with deep pocket who want to bet on startups to eventually get one or two jackpots.
Founders want massive success. Investors want to get lucrative ROI. Meeting both expectations is challenging as hell, causing some founders to do silly things. And what silly things do to investors? Money, burnt down to ashes.
You see, there’s no end to it, and to break the cycle means founders need to wake up from their daydream and start realizing that investors’ money is actually a burden; if you can’t stand the overpowering weigh of it, stay away from it. It’s probably better off for you to bootstrap, keep in grinding, and reinvest your profits.
Just my two cents.
Now it’s your turn: What are your two cents on the scandalous startup world?