Founder fraud isn’t an outlier: it’s a design flaw

Another month, another founder accused of fraud. This time it’s Christine Hunsicker of CaaStle, indicted on July 18 for allegedly falsifying financial records, misrepresenting profits, and continuing fraud even after her removal by the board. According to reports, before meeting with an audit firm, she searched online for the terms “fraud,” “created an audit firm fake,” and “JP morgan 4m records faked”—an apparent reference to fraud charges related to yet another disgraced founder, Charlie Javice of Frank. These incidents are no longer outliers. They’re becoming a pattern, and the startup world has yet to confront what that the pattern reveals: 

The startup ecosystem is designed to encourage deception.

Risk-taking and self-confidence

We all know that most founders share a penchant for risk-taking and a healthy sense of self-confidence. But couple these characteristics with the relentless assault of pressures that constitute daily startup life, and you have a recipe for trouble. Risk-taking slips into recklessness, and confidence metastasizes into outright narcissism. Lying is the norm.

Particularly during the early stages, a “Growth at All Costs” imperative means that startups feel obliged to pursue aggressive growth to secure high valuations and attract continuous investment rounds. This pressure can lead founders to inflate metrics, fabricate success, or conceal failures to maintain investor confidence. Sam Bankman-Fried of FTX secretly transferred customer funds to his trading firm, Alameda Research, concealing these movements and misleading stakeholders.

From optimism to deception

A “Fake It Till You Make It” culture means that what starts as harmless optimism can easily escalate into deliberate deception. Founders initially omit negative details, then progressively falsify data to uphold illusions of success. Nikola founder Trevor Milton exaggerated product capabilities, even staging videos of a nonoperational electric truck rolling down a hill. 

The brutal demands of fundraising result in constant pressure to secure funding and maintain operational cash flow, which often pushes founders to compromise ethically. The necessity to present a highly favorable narrative to investors encourages fraudulent embellishments. Combined with a lack of oversight and governance, especially in early-stage startups, this leaves founders unchecked, increasing opportunities for fraud. Early investors and boards often fail to provide rigorous oversight due to limited motivation or expertise.

A gradual process

White-collar fraud is always a gradual process. No one jumps straight into the deep end of the criminality pool. Law enforcement officials have a “10:10:80” rule of thumb when it comes to white-collar fraud: 10% of people would never commit fraud, 10% of people are actively seeking out opportunities to commit fraud, and 80% of people have the potential to commit fraud if the timing and circumstances are right. The vast majority of these founders probably started in the 80%, along with most of the rest of us. It often begins with minor embellishments aimed at securing initial investment. Successful deception attracts further funding, creating a self-reinforcing cycle. 

But as the discrepancies between reality and claims widen, founders face intensified pressure to maintain their narratives, resorting to increasingly severe fraud to conceal earlier lies. Witness Christine Hunsicker’s continued deception even after her board had essentially kicked her out of her company.

Seismic consequences

The consequences of all this founder misbehavior can be cataclysmic. They extend well beyond the direct financial losses to investors. Broader investor confidence deteriorates, leading to reduced funding availability for legitimate startups. Employees suffer job losses, reputational damage, and psychological distress. Customers can experience direct harm, as in Theranos’s false medical test results. The broader innovation ecosystem becomes risk-averse, slowing innovation due to increased regulatory scrutiny and cautious investment behaviors.

Potential time bombs

To mitigate this deadly cocktail of ego and pressure, we first need to understand that all founders are potential time bombs: the same traits that help them secure money, talent, and press are the ones that can eventually lead to their undoing. The old method was pretty straightforward: fire the founder, and replace them with a manager. But that only leads to zombie companies that stifle innovation in the crib. 

Startup founders are constantly being gaslit. They’re being flattered as geniuses and world-changers on a daily basis. Many of their direct reports are sharp, canny careerists who only want to share good news. It’s easy to see how people can lose perspective and start believing their own hype within the “emperor’s new clothes” environment of a startup.

These people need perspective in order to curb the worst tendencies of startup culture. Every founder should cultivate a “star chamber” of mentors who are removed from the everyday persecutions of the startup in question (perhaps an older CEO, or a colleague from an accelerator program, or a startup blogger you admire). They need advice from people whom I call “models of values”: transparency, accountability, and ethical leadership. Many boards are sadly hopeless at this, because they’re complicit in the success (at all costs) of the startup. 

Oversight and accountability

On the stick side of the carrot and stick approach, however, these people also need oversight and accountability. Their boards and investors must actively engage in governance roles, monitoring company practices and demanding transparency. They need to ensure financial transparency and operational integrity through audits and detailed reference checks.

To prevent the next Hunsicker, Javice, Bankman-Fried, or Holmes, we need to confront the cultural rot at the core of startup life. We still need ambitious entrepreneurs to drive innovation, but not within a system that rewards deception and punishes transparency. Unless we change the rules of the game—by rethinking incentives, strengthening oversight, and investing in founder development—we’ll keep producing brilliant visionaries who become cautionary tales.

https://www.fastcompany.com/91382106/founder-fraud-isnt-an-outlier-its-a-design-flaw-founder-fraud?partner=rss&utm_source=rss&utm_medium=feed&utm_campaign=rss+fastcompany&utm_content=rss