Fake it till you make it: fraud in startups

“Fake it till you make it” is the motto many founders use to justify selling today what they hope to have tomorrow. It becomes fraud when what's being faked are facts: a product that doesn't work, revenue that doesn't exist or money that isn't where they say it is. Theranos was valued at $9 billion in 2014 with a machine that, according to the SEC, ran about twelve of the more than 200 tests in its catalog; in 2022 its founder, Elizabeth Holmes, was sentenced to 135 months in prison for defrauding her investors, a sentence the judge reduced to 123 months in 2026.

What is startup fraud?

It's the deception of investors, customers or partners by a young company that presents as real what isn't real yet. It shouldn't be confused with failure. Most startups that shut down haven't deceived anyone: they made a bet, got it wrong and lost, and their investors knew that could happen. That's the rule of venture capital. Fraud starts when the risk investors think they're taking on isn't the real one, because data has been hidden from them or invented.

Where is the line between selling the future and lying?

A simple way to see it:

US courts distinguish between generic sales talk, or puffery, which isn't punished, and specific false statements of fact that a reasonable investor would take into account. Missed forecasts aren't a crime; invented data is.

How does optimism turn into fraud, step by step?

1. The vision. A big, attractive idea, a charismatic founder, a story the media buys.
2. The gap. The product or the business doesn't advance at the promised pace.
3. The shortcut. Instead of admitting the delay, they dress it up: a staged demo, a figure rounded up, an endorsement that isn't quite true.
4. The dependence. Each funding round requires keeping the previous story going and topping it. There's no going back without confessing.
5. The shield of authority. Famous directors, big-name investors and magazine covers take the place of technical checking.
6. The fall. A journalist, an employee or a cash crunch opens the box.

How do you spot a fraudulent startup in time?

• Nobody independent has seen the product work. Only demos controlled by the company.
• Secrecy is used as an excuse to keep experts from reviewing it.
• A board of celebrities with no experts from the industry.
• Revenue that can't be verified with third-party documents.
• Customers' money isn't kept separate or held by a third party.
• Hostility toward questions and pressure on employees or journalists who have doubts.
• Influencers or celebrities who promote it without disclosing that they're paid.

If you're thinking about investing, run the offer through the scam checker.

What happened at Theranos, Fyre and FTX?

Theranos (2003–2018). Elizabeth Holmes promised hundreds of tests from a drop of blood. According to the SEC, the Edison machine ran about twelve tests, and the rest were processed on commercial equipment made by other manufacturers. Her board included former secretaries of state and generals, but not a single expert in clinical lab testing. At trial she admitted that she herself had added drugmakers' logos to validation reports those companies hadn't written. In 2022 a jury found her guilty on four counts of defrauding investors and not guilty on the counts related to patients; her number two, Ramesh Balwani, was convicted on all counts, the patient ones included. It's in the case of Elizabeth Holmes, with its Law of Deception No. 15: “If you promise the future, nobody audits the present.”

Fyre Festival (2016–2017). The luxury festival in the Bahamas was sold with supermodels and influencers and ended in tents. But the crime that sent Billy McFarland to prison wasn't the festival fiasco; it was deceiving his investors: according to the SEC, he told them about millions in revenue when the company had brought in about $57,000. He was sentenced in 2018 to six years, also for selling fake tickets while he was out on bail. See the case of Billy McFarland, with Law of Deception No. 10: “When celebrities promote it, nobody asks whether it exists.”

FTX (2019–2022). Sam Bankman-Fried's exchange was a real business with real customers. The fraud, according to prosecutors, was that about $8 billion in customer deposits ended up in his fund, Alameda Research, even though the terms of service said those assets belonged to the customers at all times. FTX's chief after the bankruptcy, John J. Ray III, said he had never seen such a complete failure of controls. Bankman-Fried was sentenced to 25 years in 2024. We tell the story in the case of Sam Bankman-Fried.

None of the three was convicted for dreaming big. All three were convicted for lying about what they already had. When the lie is about the numbers rather than the product, it's accounting fraud.

Why do expert investors fall for it?

Because these frauds trigger authority (the prestigious board, the famous investor who's already in), fear of missing out on the next big company and trust in a charismatic founder. And because nobody wants to be the one who asks the obvious question. The Laws of Deception explain why a shiny wrapper switches off checking.

What should you do before investing in a startup?

1. Check the channel. In the US, equity crowdfunding must go through an SEC-registered broker-dealer or funding portal: look up the portal in FINRA's list and the broker on FINRA BrokerCheck. In the UK, check that the platform is authorized on the FCA Register and that it isn't on the FCA Warning List.
2. Ask for third-party proof: audits, contracts with real customers, a demo in front of an independent expert.
3. Invest only what you can afford to lose. Even without fraud, most startups don't make it.
4. Be wary of pressure to close the round and of secrecy used as an argument.
5. If you think you've been deceived, keep the documentation, talk to a licensed attorney of your own choosing and report it: in the US to the SEC, in the UK to Report Fraud, the service that replaced Action Fraud.