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VC-backed startups commit more fraud, and researchers think they know why
2 months ago
- A report from Imperial College and Emlyon Business School maps how Silicon Valley's VC-backed founders commit fraud and the role investors play.
- Researchers built a database of tech founders and companies prosecuted for securities fraud by the SEC and DOJ from 2000 to 2023, including cases like Charlie Javice, Do Kwon, and others.
- Fraud is more normalized in startups than acknowledged, often driven by investor pressure for extreme growth, especially in overheated markets like the current AI boom.
- The study identifies three stages of dishonesty: surface façading (lying about success), reinforced façading (creating fake evidence), and deep façading (building parallel realities with fake demos).
- Investors co-create fraud by continuing to back founders previously accused of fraud, normalizing misconduct, and founder-controlled boards double the likelihood of fraud.
- VC-backed startups that go public face securities class-action lawsuits more often than private equity-backed ones, and staying private longer reduces scrutiny.
- The report recommends routine SEC audits after a large investment threshold and holding investors accountable for pushing unrealistic growth expectations.
Before the Startup
2 months ago
- Startups are counterintuitive; trusting instincts can lead to mistakes, but trust gut feelings about people.
- Expertise on users and solving their problems is more important than knowledge about startups themselves.
- Avoid 'playing house' by imitating startup activities; focus on making something people want.
- Gaming the system doesn't work for startups; success comes from genuine user satisfaction, not tricks.
- Startups are all-consuming and change your life irrevocably; it's not advisable to start one in college.
- You can't predict success in startups; the only way to find out is to try, but not during college.
- Good startup ideas emerge naturally from learning and working on interesting problems, not from forced ideation.
- College is best used to learn powerful things and develop genuine curiosity, not to focus on entrepreneurship.
Why Startups Condense in America
2 months ago
- Startups thrive in clusters like Silicon Valley due to specific conditions that are hard to replicate elsewhere.
- Immigration is crucial: Silicon Valley's diversity is a key asset, and countries like Japan struggle due to restrictive policies.
- The US's wealth provides infrastructure and baseline prosperity, whereas poorer nations like India face challenges in supporting innovation.
- Civil liberties and political freedom foster imagination; police states like China suppress the dissent needed for technological innovation.
- Top-tier US universities (e.g., Stanford, MIT) seed startups; many countries lack comparable institutions due to egalitarian policies or historical issues.
- Flexible employment laws in the US allow startups to fire underperformers, while rigid European laws hinder growth.
- Work in America is less tied to lifelong employment, making it easier for individuals to start companies.
- Minimal business regulation in the US enables startups to begin informally (e.g., in garages), unlike in fussier countries with high capital requirements.
- A large domestic market (300 million) allows startups to test products locally, whereas smaller countries must internationalize from day one.
- Venture capital and angel investors are more accessible in the US, thanks to private universities and a culture of reinvestment.
- Career paths in the US are fluid, allowing late-bloomers to become startup founders, unlike rigid European systems.
- Europe's historical disasters dampened ambition, but this can be overcome with more examples of successful startups.
- To surpass Silicon Valley, improve urban planning (closer to interesting cities, better public transport) and national policies (lower capital gains, smarter immigration).
Why to Not Not Start a Startup
2 months ago
- Y Combinator's first batch had a 50% success rate, with 0% of founders regretting the experience.
- Most people hesitate to start startups due to a mix of real and bogus reasons; analyzing them helps.
- Common fears like being too young, inexperienced, or lacking a cofounder are often overstated.
- The best way to gain experience is to start a startup, not get a regular job.
- A good idea is not essential initially; startups often pivot, and focus on building something people want.
- The shift from farming to manufacturing parallels the current shift to startups, making it a historic opportunity.
After Credentials
2 months ago
- The US has shifted from credential-based to performance-based evaluation over the past 25 years, unlike South Korea where university entrance exams still dominate.
- Credentials originated as an improvement over bribery and family influence, but they are imperfect and lead to cram schools that exploit the system.
- Parents naturally try to use their wealth or power to give their children an advantage, which society must counteract to ensure meritocracy.
- Improving credentials is a long-term solution, but a more effective approach is to reduce the importance of credentials by measuring actual performance.
- Small organizations and startups evaluate performance directly, making credentials less relevant, and this trend is spreading through the economy.
- The rise of market-based pay for young workers, exemplified by yuppies and startups, has driven the shift from seniority to performance-based rewards.
- Encouraging an economy of smaller units and measuring performance is a better way to prevent intergenerational power transmission than relying on credentials alone.
How to Raise Money
2 months ago
- Only raise money if you want it and it wants you; avoid fundraising if you don't need it or can't convince investors.
- Be in fundraising mode or not—focus entirely on fundraising when you do it, and avoid distractions from investors when not.
- Get introductions to investors, preferably from well-known investors or founders, and use platforms like AngelList as auxiliary sources.
- Treat investors as saying no until they make a definite, unconditional offer; avoid being misled by vague commitments.
- Use breadth-first search weighted by expected value: talk to investors in parallel, prioritizing those with higher likelihood and impact.
- Know where you stand by asking what happens next and tracking progress; never leave a meeting without clarity on next steps.
- Get the first commitment as it's the hardest part; close committed money quickly to avoid buyer's remorse.
- Avoid investors who won't 'lead' (i.e., only invest after others); they are worthless initially.
- Have multiple plans depending on how much you can raise, and underestimate your desired amount to build momentum.
- Be profitable if possible (Type A fundraising) to negotiate from strength; don't optimize for valuation—focus on getting the money and good investors.
- Accept offers greedily (take acceptable offers immediately) and avoid complex optimizations; don't sell more than 25% in phase 2.
- Have one founder handle fundraising, keep growth going, and stop fundraising when it stops working; don't get addicted to the process.
Change Your Name
2 months ago
- If a US startup lacks the .com domain matching its name, it should consider changing its name.
- Not having the .com domain signals weakness and marginality, unless the company is already well-known.
- Founders often deny this issue due to identity attachment and lack of imagination in naming.
- The attachment to a name is mostly from it being associated with the company, not intrinsic quality.
- Naming is a separate skill from founding; founders can be bad at naming and should seek help or explore alternatives.
- Many good, cheap or untaken domain names exist; systematic search can find them (e.g., Stripe's approach).
- Evidence from YC companies: 100% of top 20 by valuation have the .com of their name, but only 66% of current batch do.
Economic Inequality
2 months ago
- Economic inequality has multiple causes, both bad (tax loopholes, drug addiction) and good (like Larry Page and Sergey Brin's startup).
- Treating inequality as a single phenomenon is a mistake; the pie fallacy wrongly assumes wealth is taken from the poor.
- Wealth can be created (e.g., a woodworker) rather than taken (e.g., high-frequency trader), differentiating good from bad inequality.
- Startups are a major source of wealth creation; eliminating great variations in wealth would mean eliminating startups, which is unwise.
- Variation in productivity is the irreducible core of inequality, accelerating with technology and not easily eradicated.
- Policy should focus on specific problems like poverty and abusive practices, not on inequality as a broad target.
- Aiming at economic inequality may miss the real issues; we should instead attack poverty and wrongful wealth acquisition.
How People Get Rich Now
2 months ago
- In 1982, 60 of the 100 richest Americans inherited their wealth; by 2020, only 27 did.
- New fortunes in 2020 came mainly from starting companies (56 of 73) and investing (17 of 73), replacing oil and real estate dominance in 1982.
- Tech companies became the primary source of new wealth in 2020, accounting for about 30 of the 73 new fortunes.
- The shift is not a new phenomenon but a return to the norm seen in 1892, when only about 20% inherited wealth and new fortunes came from technology.
- The mid-20th century was anomalous due to corporate consolidation and oligopolies; deregulation and microelectronics since the 1970s broke up that structure.
- Costs of starting and growing a startup have decreased dramatically, enabling more founders to create highly valuable companies faster.
- Fast growth and cheaper fundraising allow founders to retain more equity and become rich younger.
The Other Road Ahead
2 months ago
- Server-based (Web-based) software is becoming the dominant model, offering significant advantages over desktop software for both users and developers.
- Users benefit from easier access, no installation, automatic updates, data safety, and the ability to use any device with a browser.
- Developers can release incremental updates frequently, reproduce bugs easily, use any programming language, and work in smaller, more efficient teams.
- Startups have a unique opportunity to compete with big companies due to low startup costs, direct delivery to users via the web, and the ability to outwork larger competitors.
- The shift to server-based software reduces the need for Windows, posing a threat to Microsoft's dominance, but startups can thrive in this new environment.
- Challenges include increased responsibility for programmers (who become system administrators) and the stress of managing live, always-on services.
- The subscription-based revenue model is natural for Web-based applications, providing recurring income and eliminating piracy issues.
How to Make Wealth
2 months ago
- Startups compress a working life into a few years by working extremely hard on hard technical problems.
- Wealth is not money; it's the stuff people want. Money is just a medium of exchange.
- The pie fallacy is wrong: wealth can be created, not just redistributed.
- Startups succeed by combining measurement (small groups) and leverage (new technology).
- The catch is high risk: most startups fail, and payoff is all-or-nothing.
- Focus on users as the measure of success; getting acquired often depends on user numbers.
- Historical rule of law enabled wealth creation, leading to industrialization and global power.
Hiring is Obsolete
2 months ago
- The cost of starting a startup has dropped dramatically, now mainly requiring food and rent, enabling more people, including undergraduates, to start companies.
- Young people are often undervalued by employers, but the market can directly value them through startups, and users don't care about age.
- Big companies struggle with product development and often buy startups to acquire talent and technology, which is becoming more efficient than in-house development.
- The trend of large companies acquiring early-stage startups will accelerate, with hybrid investment-acquisition models becoming common.
- Investors have less power over founders as startups need less funding, allowing founders to retain control and avoid being replaced by CEOs.
- Risk is proportionate to reward; young people should take career risks like starting a startup because they have time to recover from failure.
- Experience is not the main barrier; the key is learning to make something users want, which can be understood by talking to users directly.
- The essay advises finishing college and working for a company before starting a startup, but acknowledges exceptions like Bill Gates who succeeded by dropping out.
Inequality and Risk
2 months ago
- Reducing economic inequality essentially means taking money from the rich, which diminishes their willingness to take risks.
- Startups are inherently risky and require proportionate rewards; without them, startup creation declines.
- Startups drive technological growth and job creation; eliminating them leads to slower innovation and economic stagnation.
- A better approach is to break the link between wealth and power through transparency and anti-corruption measures, rather than attacking wealth directly.
- Risk and reward are proportional; suppressing inequality suppresses risk-taking, harming economic progress.
What I Did this Summer
2 months ago
- The first Summer Founders Program in 2005 was surprisingly successful, with 3-4 out of 8 startups expected to succeed despite a typical 10% success rate.
- Young hackers (ages 18-28, average 23) can start viable companies, confirming that success depends more on intelligence and energy than age or experience.
- Startups can be launched with minimal funding ($20,000 max), and three months is enough to reach a prototype stage, as demonstrated by all groups.
- Founders worked extremely hard and responsibly when given autonomy and meaningful work, contradicting stereotypes of laziness and irresponsibility in young people.
- Idealistic founders who want to change the world are more motivated than those only seeking money, leading to better products and higher chances of success.
- Competitors are rarely as dangerous as they seem; startups should focus on being ahead and fast, not on the number of competitors.
- Initial software versions should be lightweight and evolvable, prioritizing experimentation over scalability, internationalization, or heavy security.
- Founders learned quickly from each other and from practice, notably improving their presentations dramatically after a single coaching session.
- The batch format of investing (e.g., summer and winter cycles) proved more efficient for Y Combinator and beneficial for startups, providing social events and peer learning.
- Independence is crucial: giving founders full control fosters a sense of ownership and growth, and most hackers can develop the necessary qualities when given freedom.
The Venture Capital Squeeze
2 months ago
- Venture capital funds face a squeeze from four directions: too much money chasing too few deals, decreasing startup costs due to open source, Moore's law, the web, and better languages, Sarbanes-Oxley increasing regulatory burdens, and acquirers buying startups early before they need VC funding.
- Startup costs have dropped dramatically—software is free, hardware is cheap, promotion is free via the web, and modern languages like Python or Ruby enable single programmers to build applications.
- Sarbanes-Oxley deters IPOs, making acquisition the primary exit for startups, which shifts the VC role to building companies for acquisition.
- Acquirers like Google are now buying startups at the Series A stage, bypassing VCs and undermining their traditional model.
- Proposed solutions for VCs include lobbying to loosen Sarbanes-Oxley and allowing founders to partially cash out in early funding rounds to align risk incentives.
Are Software Patents Evil?
2 months ago
- The author was granted four patents despite applying for three, highlighting the prevalence of software patents.
- Software patents are fundamentally no different from hardware patents, as modern machines rely increasingly on software.
- The patent office's inability to evaluate software novelty leads to granting obvious patents, like Amazon's one-click patent.
- Startups should not worry about infringing patents; they rarely get sued, and focus should be on building great products.
- Patents serve primarily as a defensive tool for startups seeking acquisition or growth, aiding in the 'mating dance' with acquirers.
- Patent trolls exploit the system by suing successful companies for profit, but they do not significantly hinder innovation.
- Overall, software patents have a minor impact on innovation, with startups ignoring them and focusing on user growth.
How to Be Silicon Valley
2 months ago
- The key to creating a Silicon Valley is attracting the right mix of rich investors and nerdy founders, not buildings or government programs.
- Government bureaucrats make poor startup investors because they lack the experience, motivation, and personal stake of private venture capitalists.
- Universities are essential as magnets for smart people, but they must be located in a city with personality—intact centers, youthfulness, tolerance for odd ideas—that nerds enjoy.
- Startups grow organically: successful ones spawn new founders and investors, and this chain reaction takes time, typically years, and cannot be forced.
- A new technology hub can compete with Silicon Valley by offering a better quality of life, avoiding suburban sprawl and preserving charm.
The Hacker's Guide to Investors
2 months ago
- Investors are the critical ingredient in a startup hub, with angel investors being more important than VCs for early-stage funding.
- Most investors are momentum investors who rely on signals like traffic and other investors' opinions rather than deep technological understanding.
- Investors vary greatly; top-tier VCs are smarter and more confident, while others may be timid and risk-averse.
- Valuations are largely artificial and often driven by deal size; founders should focus on outcomes rather than high valuations.
- The fundraising process is costly in time and momentum; investors often delay decisions and dislike saying no.
- Founders can improve their position by not needing investors and having backup plans; investors prefer startups that are rough with them.
- Investors often collude and care about their portfolio, not individual companies; they may push for risky kill-or-cure strategies.
News from the Front
2 months ago
- College choice may matter less than commonly believed, as individual effort and learning depend more on the person than the institution.
- Startup success, as observed by Y Combinator, shows negligible correlation with college prestige; performance in the real world is determined by what you build.
- Elite colleges often perpetuate a system that favors brand names and conformity, but this advantage is less relevant in startups where user satisfaction is the only measure.
- Admissions processes are imperfect and based on superficial criteria, leading to weak predictors of future success.
- The biggest disadvantage of not attending a desired college is often self-imposed insecurity; the actual benefits of elite schools are often overestimated.
- Focusing on learning and doing, rather than college credentials, is both more rewarding and increasingly the path to success.
The Future of Web Startups
2 months ago
- Startups are becoming cheaper to start, leading to a surge in new companies, similar to how technology becomes a commodity.
- Standardization of investment terms and acquisition processes will increase as startup volumes grow.
- Younger and more technical founders will be able to start startups without needing investor approval first.
- Startup hubs like Silicon Valley will persist and become even more important despite lower startup costs.
- Investors and acquirers will need better judgement to handle the increasing number of startups.
- College education will shift focus from degrees to practical skills and co-founder connections.
- More competitors will emerge, but the overall wealth creation is not zero-sum; technology will advance faster.
- Big companies are less productive for innovation; startups will drive faster technological evolution.

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startups

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

Before the Startup

Why Startups Condense in America

Why to Not Not Start a Startup

After Credentials

How to Raise Money

Change Your Name

Economic Inequality

How People Get Rich Now

The Other Road Ahead

How to Make Wealth

Hiring is Obsolete

Inequality and Risk

What I Did this Summer

The Venture Capital Squeeze

Are Software Patents Evil?

How to Be Silicon Valley

The Hacker's Guide to Investors

News from the Front

The Future of Web Startups