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:

  1. 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.
  2. 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. 
  3. 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.



3 comments on “Ethics in Venture-Backed Startups”

  1. Great concern!
    Yes, a lot of startups were just bullshitting until it’s bankrupted. But how do you identify the difference between bullshitting and dreaming big? If you can do it at 51% of the time, you are a good investor! If you can do it 55% of the time, you can earn millions from investment banks. If you can do it 60% of the time, you are the next Warren Buffet. See how difficult it is? Investment is a gambling game with a probably higher expected return; the strategy is to make the best reasonable choice each time. The outcome will automatically come to you although sometimes it can be due to noise. There are many problems with every single company, for example, Tesla! Who knows if Tesla will fail within the next few years? This is at least a billion-dollar question already. Nobody exactly knows it. Even if some do, they won’t share billions return with you. Thus, it’s just too difficult to identify the problems. It’s not like some people are stupidly ignoring facts… Statistically, investors are among the smartest people already.

  2. Also, if you feel this way, maybe it’s possible that the world needs a correction wiping out the current bubble : D

  3. It is true how many startups have adopted unethical stances, especially in the Silicon Valley. We have seen many instances of lies such as Rocket AI faking a launch.

    HOWEVER, there is another angle to this. Whenever startups go to investors and public and tell the them they’re planning to do something not possible thus far or to do something that looks way beyond their capacity, it is often backed by the belief and enthusiasm of the startup leadership.
    If we want the startup culture to thrive then we have to allow for an atmosphere that allows for young CEOs to set unimaginable goals and groundbreaking claims. Yes, despite the belief and passion many startups may not be able to achieve their tremendous claims and goals. But whenever they are able to successfully disrupt a market then it will be because they they set out with goals beyond the apparent capacity.


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