It turns out the venture capital industry doesn’t just merely fund junky AI startups — it also systematically breeds the conditions for fraud.
A new joint study from researchers at the UK’s Imperial College and France’s Emlyon Business School analyzed 12 companies involved in 27 court cases related to civil or criminal cases related to securities fraud. The cases totaled around $688 million in financial losses, and resulted in 73 years of cumulative prison sentences.
After analyzing the individual cases, the researchers identified a persistent pattern of “façading,” in which startup entrepreneurs hide their flailing businesses from scrutiny through an assorted mix of fraudulent behavior.
The research, first reported by TechCrunch, identified three various types of façading: surface, reinforced, and deep façading, which are “contingent on the severity of the gap that entrepreneurs face between audiences’ performance expectations and ventures’ performance reality,” the paper explains.
The first form, surface façading, happens when startup founders create fictional stories of “imminent venture success,” like the kind of AI-washing that hit its stride in 2024, embodied by companies like Builder.ai that went on to collapse like a billion-dollar houses of cards.
This escalates into “reinforced façading” when founders begin to cook up things like bank statements or customer contracts to sell the surface story, and take pains to centralize the flow of information around the startup’s performance. One example of this might be the company iLearning Engines, a $1.5 billion AI startup which was found to be faking “virtually all its customer relationships and revenues” by a Department of Justice probe earlier this year.
Deep façading, the final and most severe form, encompasses broad forms of market manipulation, like faking product demonstrations, sabotaging internal efforts at due diligence, and manipulating regulation. This last form, one could argue, is embodied by the current front-runners of the tech industry’s AI boom, which have engaged in significant political lobbying, sabotaged their own internal research on AI safety, and routinely dress up human labor to appear like autonomous AI.
Ultimately, the line between criminality and free market innovation is thin, especially where seemingly-magical and proprietary new technologies like AI are involved (a technology which currently represents a $1.6 trillion gap between investor expectations and practical reality.)
“By engaging in façading, entrepreneurs effectively decouple the venture’s externally projected appearance from its operational reality, making it appear to audiences as if no expectation-reality gap exists, despite the venture’s actual (subpar) performance,” reads the paper. “Entrepreneurs transgress from dramatized discourse into criminal deception when their stories become unhinged from reality and involve increasingly sophisticated organizing efforts to fabricate material evidence, data, and information about their ventures’ performance.”
More on startups: We Are Mildly Horrified by This AI Startup That Coerced People Into Getting Tattoos of Its Logo in Exchange for a Job Interview
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