Ethics in Venture-Backed Startups
Ethics in venture-backed startups got me thinking from the presentation on Friday. Admittedly, I have no experience with startups, but I do invest in the stock market and love reading the latest news on certain companies. I have seen public companies let go of CEO’s for missing profit expectations, or for stretching the truth when it comes to reporting. There is good reason to, as the impact to the Company is not only unrealized earnings, but unrealistic reporting can result in large fines for not following the guidelines detailed in the Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws. To add even more accountability, a corporation is defined as a legal entity and can be sued & charged criminally just like you or I, an even bigger incentive for the shareholders to hold accountable those in charge of reporting.
Securities and Exchange Commission (SEC) also works to protect investors of startups by regulating, investigating, & potentially charging startups that have failed to abide by enforceable guidelines or the law, such as Theranos, the once famed Company that promised to revolutionize blood tests. Couple this with the fact that venture backed startups typically have a smart group of people reviewing the proposals & it seems the failure rate of start-ups would be minimized. Deborah George, from the Wall Street Journal made the following statement in regards to venture capital startups; “The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns.”
Why are so many failing? The media often touts claimed knowledge for failures such as lack of cash, people, market analysis, etc, but is there another variable? Venture backed startups are known for making bold claims towards profits, delivery forecasts, & abilities of their invention – how else would people invest? I am curious if making false claims about capabilities are an underlying cause for the vast amount of failures.
Take for instance the following stories:
- Juicero, the failed Company that claimed its juicer had 4 tons of force which was instrumental in using its proprietary juice packets; It was later found out that these juice packets could be squeezed by hand and produce almost the same amount of juice as the $400 machine.
- Hampton Creek, a vegan food Company who purchased their own products and had employees do in-store call ins about the product. The speculation was that Hampton Creek did this to bolster a false desire and profit for their product to investors.
- Elio Motors, a start-up Company that looked to disrupt the automotive industry with an 84mpg three wheel car offered for less than 8,000. The problem is, nothing has ever been produced, although every year from 2014-2019 had a claimed production date. They still take non-refundable reservations on their website, and with less than $8,000 in the bank account, I would rather take my chances on winning the lottery than getting an Elio vehicle.
So what do all of these companies have besides a rocky past? None of them have been convicted of any wrongdoing aside from Theranos, who seemed to set the precedence in startup accountability, but I question how much that accountability will transition to other startups that only pose a financial risk to people & investors vs. a health risk.
With the ability to make these far reaching/unfounded claims & decisions as a startup, it almost seems that there is a sense of impunity these companies can act on. Tighter regulations seems to be in order for this newly emerging market.