![]() It is no wonder things have begun to spiral out of control.įurther compounding this issue is the “fake it till you make” mindset that runs rampant through Silicon Valley. Thus, the founders of these companies are now simultaneously being given excessive amounts of money to use within the company as they please, and being released from any oversight, by regulations and investors, on how they are running the company. They did so by implementing a more “founder friendly” model, which often gives founders special shares of the company that hold extra voting power, allowing the founders to retain at least some control of the company. With this new competition, VCs had to change their structure to entice founders to still work with them. This is in great contrast to the traditional source of funding for such companies, Venture Capital funds (VCs), who would essentially trade money for control of the company. These investors have come onto the scene with a lot of money and a lot less interest in controlling the companies they are investing in. In addition to these regulatory changes, there has been an influx of new kinds of investors looking to invest in private startup companies. ![]() With no one watching them and no threat of future scrutiny, it has become increasingly easy, and probably tempting, for these private companies to make morally, ethically, and sometimes legally, questionable business decisions to increase the company’s success. Thus, the pressures of an impending IPO have disappeared for many private companies, which has in turn removed the pressure to keep everything by the book for the inevitable future disclosures. These regulations have made it easier for companies to increase their capital while remaining private and have upped the thresholds that trigger mandatory reporting. In more recent years, regulations have changed and subsequently made it much easier for companies to stay private. Because they had an impending IPO looming over them, these companies usually acted by the book while they were still private to prevent issues from popping up when they had to disclose company information during the IPO. Most private companies knew they would eventually go public because of a need for more capital and/or because they would grow past a certain threshold which would trigger mandatory reporting. Initial Public Offerings (IPOs), which among other things bring companies into the public eye and help hold them accountable for their actions, were previously quite common. This is due to a noticeable shift in the lifecycle of startup companies. They were once a rather rare occurrence, as indicated by their name, but in recent years they have become increasingly common. The answer to these questions appears to be connected to the regulation (or lack thereof) of “Unicorns.” Unicorns are private companies with a valuation of over $1 billion. After news broke of the massive fraud, many wondered how and why it was able to happen. Theranos is a Symptom of a Larger Problem within VC Backed StartupsĮarly last year, Elizabeth Holmes was charged with wire fraud for lying to investors about the capabilities of her company, Theranos.
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