In the world of startups, success is never guaranteed. Unfortunately, some promising companies have failed due to the illegal actions of their owners. From fabricating data to committing bank fraud, these actions can lead to the downfall of even the most promising ventures.
In this blog post, we explore some examples of startups that could have become reputable brands if not for the misguided actions of their founders. We also examine the motivations behind why some young entrepreneurs engage in fraudulent activity and the consequences that can result from such actions.
High-Profile Startup Fails
There have been several high-profile cases of startups failing due to the illegal actions of their owners, including the following companies that became household names – for the wrong reasons.
Theranos
Theranos was a blood-testing startup that claimed to be able to perform hundreds of tests using just a few drops of blood. However, the company’s founder, Elizabeth Holmes, was charged with fraud in 2018 after discovering that the technology did not work as advertised.
Zenefits
Zenefits was a software startup that provided companies an easy way to manage employee benefits. However, the company’s founder, Parker Conrad, was forced to resign in 2016 after it was revealed that Zenefits employees were selling insurance without proper licenses. Businesses can hire internal auditors to help them stay on the right side of the law.
Clinkle
Clinkle was a mobile payments startup that raised over $30 million in funding before ultimately failing. The company’s founder, Lucas Duplan, was accused of mismanaging the company’s funds and spending money on lavish parties and personal expenses.
Juicero
What made Juicero popular was its high-tech juicing machine that could squeeze juice from specially designed packets of fruits and vegetables. However, the company’s founder, Doug Evans, was accused of falsely claiming the machine’s capabilities and overstating the company’s financial prospects.
Under 30’s Who Got It Wrong
There are a few under 30 startup founders who have crashed spectacularly, and The Guardian mentions Charlie Jarvice, the founder of a student financial aid startup called Frank, who has been charged with accounts of wire and bank fraud by the Justice Department.
Allegedly she inflated the number of customers her company had to sell it to JPMorgan Chase for $175 million.
Damning evidence in the public domain includes Javice saying on LinkedIn that Frank had served over 5 million students at over 6,000 colleges. The reality, however, was that the company only had about 300,000 clients.
To get to the inflated customer database numbers, Jarvice is accused of enlisting a data scientist to make up a few million customers.
How it wasn’t a red flag to JPMorgan Chase during its due diligence is anyone’s guess. Unfortunately, Javice’s actions can carry a 30-year sentence. Javice denies all allegations against her.
Charlie Jarvice is not alone; there are many young entrepreneurs failing to keep it real including:
- Martin “Pharma Bro” Shkreli
- Ivan Pavlich – Hypernet
- Obinwanne Okke – Invictus Group
Shkreli was convicted of securities fraud.
While not aware of each other’s activities and thus unrelated, the promise of making a fortune through cryptocurrency proved too tempting for both Pavlich, a scientist from New Zealand, and Okke, a business entrepreneur from Nigeria. Despite their promising careers, they were lured by the potential wealth that could be gained through illegal activities associated with cryptocurrency investing. Unfortunately, their pursuit of cryptocurrency riches ultimately led to the downfall of their careers.
Why Young Startup Founders Flounder
What prompts successful young entrepreneurs to engage in illegal activity like bank fraud?
It’s important to note that engaging in fraudulent activity is not a characteristic of successful young entrepreneurs. However, in cases where a young entrepreneur engages in bank fraud, a variety of factors could prompt such behavior, including ego, greed, desperation, and more.
1. Financial pressure
Starting a new business can be expensive, and entrepreneurs may feel pressure to meet financial obligations such as loan payments or investor expectations.
If an entrepreneur feels unable to meet these financial obligations, they may resort to fraud to cover their expenses or maintain their lifestyle.
2. Overconfidence
Entrepreneurs are often seen as risk-takers, which can sometimes lead to overconfidence. Entrepreneurs may engage in fraud because they are convinced their business will eventually succeed enough to cover losses.
Plus, an inflated ego can distraught your grip on reality, and as such, you may truly believe you can get away with doing stuff that is borderline okay or plainly illegal.
3. Desperation
Suppose entrepreneurs struggle to keep their businesses afloat or face bankruptcy. In that case, they may feel desperate and be more willing to engage in fraudulent activity as a last resort to keep their business going.
4. Greed
Unfortunately, some people are simply motivated by greed and will engage in fraudulent activity to enrich themselves at the expense of others.
5. Lack of ethics or moral compass
Finally, it’s possible that some young entrepreneurs may not have a strong ethical or moral compass and may engage in a fraudulent activity simply because they don’t see anything wrong with it or because they believe the ends justify the means.
It’s important to note that these factors are not excuses for fraudulent behavior and that engaging in such activity can have serious consequences, both legally and professionally. As such, it’s important for young entrepreneurs to prioritize ethical behavior and seek out support and resources when facing financial or business challenges.
Fake It Until You Make It
Is the expression: “fake it till you make it” responsible for young entrepreneurs fabricating their business’s success?
Ivan Pavlich of Hypernet said it was at Standford University where he learned to develop a ‘take risks’ mindset. Clearly, he took it a step too far.
The phrase “fake it till you make it” suggests that if you act as if you have confidence and competence in a particular area, eventually, you will develop that confidence and competence. While this can be a useful mindset for individuals lacking self-assurance, engaging in unethical or illegal behavior is not a license.
Some young entrepreneurs may be tempted to fabricate their business’s success, particularly if they believe doing so will attract investors or customers. However, such behavior is not only unethical but also unsustainable. Eventually, the truth will come to light, and the consequences could be severe, including legal action, damaged reputation, and loss of customers.
Therefore, it is important for entrepreneurs to focus on building their businesses ethically and sustainably. This means being honest about their strengths and weaknesses, seeking advice and mentorship when needed, and being transparent with investors, customers, and other stakeholders. By doing so, they can build a solid foundation for their business’s success and avoid the pitfalls of dishonesty and deception.
