In the past, the venture capital investors who backed startups were reluctant to pursue legal action when they were duped. That has changed.
Not only has funding dried up for cash-burning startups over the past year, but now, fraud is also in the air, as investors scrutinize startup claims more closely and a tech downturn reveals who has been taking the industry’s “fake it till you make it” ethos too far.
The funding downturn may be to blame. Unethical behavior can largely be overlooked when times are good, as they were for tech startups in the 2010s. Between 2012 and 2021, funding to tech startups in the United States jumped eightfold to $344 billion, according to PitchBook, which tracks startups. More than 1,200 of them are considered “unicorns” worth $1 billion or more on paper.
The Justice Department has also been urging prosecutors to “be bold” in its pursuit of more business frauds, including at private startups. Thus, charges for founders of Frank, Ozy Media, Slync and HeadSpin and expectations of more to come. But as more startup frauds are revealed, these titans of industry are playing a different role in lawsuits, bankruptcy filings and court testimonies: the victim that got duped.
Warriors watch parties return to Chase Center's Thrive City Even with Golden State on the road, the Warriors' home turf remains a prime postseason party spot for members of Dub Nation When Javice was trying to sell her college financial planning startup, Frank, to JPMorgan Chase, she told an employee not to share exactly how many people used Frank’s service, according to an SEC complaint. Later, she asked the employee to fabricate thousands of accounts, assuring her staff that such a move was legal and that no one would end up in “orange jumpsuits,” the complaint said.
Yet investors plowed money in anyway and even allowed Outcome Health’s co-founders, Shah and Shradha Agarwal, to cash out $225 million worth of shares. One of the company’s smaller investors, Todd Cozzens of Leerink Partners, said he was not deterred by red flags like missing revenue targets and other “sloppiness,” because “they could have cleaned that up.” The company crossed into fraud when it altered a sales report, which would have been difficult for outsiders to detect, he said.
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