Startup founders are often charismatic, sometimes controversial, and are willing to go to the limit to make their business succeed. For successful entrepreneurs, their startup is their life, and often their identity.
Being an extroverted, charismatic founder often brings success, or at least attention to a business, hence why many successful startups are headed up and driven by outgoing, exuberant founders. Take Elon Musk as an example. It’s safe to say the Tesla CEO is controversial and charismatic, which can often be to his own detriment, yet his comments gather attention for his and Tesla’s brand, often driving stock prices higher, or bringing attention to new product launches.
However, being extroverted and controversial aren’t always ingredients for success. We often hear of the spectacular rise and fall of once visionary entrepreneurs. Adam Neumann, the founder of WeWork, managed to convince investors his WeWork business model – a loss-making startup once valued at tens of billions of dollars – could change the world. This was until it was revealed that a number of conflicts of interest had overinflated the company’s performance metrics.
Similarly, Elizabeth Holmes, founder of Theranos, was recently found guilty of fraud for claims made by her seemingly revolutionary blood testing business which was once valued at $9 billion. She is now facing time in prison.
When these startup founders are found guilty of misconduct, fraud or corporate mistakes, common wisdom has it that these are a handful of ‘bad apples’ – one-off con men and women who deliberately broke the rules and brought their employees and investors down with them.
But rather than being the preserve of a few bad actors, is fraud perhaps more widespread in the startup world than we realize? Are these outliers in fact indicative of a systemic issue? This appears, on closer view, to be a failure of scrutiny within the entrepreneurial ecosystem and the result of a “who dares wins” culture that can spill over into rule breaking.
Investors lacking incentive to enforce oversight
Entrepreneurs grab attention if they are visionaries or seen as innovative in their field. Neumann sold a unique philosophy promising to rethink the nature of work itself. Holmes told a story of her own fear of needles and the transformative power of Theranos’ diagnostic technology. The greater the potential, the more investment, and the heavier the pressure on entrepreneurs and their ventures to live up to the hype.
And this can also result in a lack of investor oversight. Early-stage investors might be sucked into a business because they know the founder personally or are drawn to a vision, but they may be compromised by a lack of knowledge of a technology or a sector, or by personal connections blinkering their professional judgement. They’ve placed a bet, and often sit on the board, having the responsibility for monitoring a business, but can be ill-equipped to do the job, and may have little incentive to do it well.
Holmes famously recruited former US Secretaries of State George Schultz and Henry Kissinger to her board – neither of them experts in medical technology. Both men chose to back Holmes over whistleblowers, even when one employee to sound the alarm was Schultz’s own grandson.
Heavyweights recruited to the Theranos board personally invested and had much to lose – reputationally and financially - if the ship went down, yet these were the very people with formal responsibility to exercise control and supervise conduct. This represents a structural failure: entrepreneurs bring people on board through personal connections and vested interests, but accountability and control go out the window when investors and directors are compromised.
Pushing boundaries meets lack of control
The whole concept of start-up culture can create misconduct. The “fake it till you make it” and the “fail fast, fail early and fail often” mentality can be a licence for deceptive behaviour. Rule bending, and at times breaking, is allowed and positively encouraged in the name of creative disruption.
Arguably, it’s this culture which permitted Trevor Milton to release a misleading promotional video, apparently showing a truck driving on the road powered by his hydrogen fuel cell startup, Nikola. This encouraged cybersecurity entrepreneur Robert Boback, to install fake computer towers with twinkling lights in an attempt to make his company Tiversa’s software appear flashier and more sophisticated.
Startups are not subject to the kinds of oversight that control professions such as law, medicine, engineering and education. Being disruptive, innovative and ahead of the competition is encouraged, pushing founders to cut corners. After all, they are rewarded with more fame, more investment and more hype if they appear to be changing the sector.
Yet, in the absence of clear boundaries and internal controls, it’s difficult to distinguish when an enterprise tips over from optimism into misconduct. How can you tell when what you are doing is no longer acceptable? With few formal controls, we are relying on an individual’s moral compass to do what is right.
While not all misconduct is so blatant, startup culture makes individuals vulnerable to wrongdoing through anticipation of the ultimate benefits. Cooking the books can be the logical conclusion of the combination of extreme pressures to perform, high expectations and a lack of checks and balances.
Examples we’ve looked at in our paper are just those which have reached public attention, but how many more have passed under the radar? We certainly don’t yet know the whole story, but the problem may be far more widespread than we believe. At a policy level, more oversight may be required. At an individual level, we might need to ask ourselves "how much am I blindly following the startup cult? Is this still legal?"
This article was authored by Dr Tim Weiss, Assistant Professor of Innovation and Entrepreneurship at Imperial College Business School.
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February 02, 2022 at 06:29PM
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