The Right Amount of Fraud in Seed Stages Startups is Greater than 0% But It Shouldn’t Be Pardoned

2 min read5 days ago

People are surprised when I say “the right amount of fraud in seed stages startups is greater than zero.”
What I mean is, the community works best when we move quickly, and assume trust between parties. That will likely mean there are some founders who commit fraud (and some investors too I guess). The cost to the ecosystem for doing so much diligence and background checks to achieve zero fraud would punish the 99.9% of founders who are ethical. And punitive unfairly — there are probably people who are totally honest nice folks but you can always turn up a rumor or a mistake earlier in their lives — we don’t want these things to be disqualifying if they’re righteous now.
At each phase — Series A, B, etc — there should be *less* fraud. Because it gets discovered, stopped, or whatever. Basically, by IPO or other exit there should be aspirationally zero fraud.
Zero fraud is still likely impossible so we need mechanisms to punish those who are fraudulent at those stages. The fear of getting caught and paying the fine/doing the time is necessary alongside whatever morals/ethics they should have as individuals.
When financial fraudsters get pardoned for their crimes [Nikola, Ozy] before the punishment has been completed, it creates an environment that changes the calculation for those who might commit these crimes. This is wrong regardless of political beliefs and the two I cited above have nothing to do with regulatory policies of either party, but the rule of law.

Originally published at https://hunterwalk.com on March 29, 2025.

Written by Hunter Walk