EA - YCombinator fraud rates by Ben West

Link to original articleWelcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: YCombinator fraud rates, published by Ben West on December 25, 2022 on The Effective Altruism Forum.SummaryI estimate that 1-2% of $100M+ YCombinator-backed companies have faced serious allegations of fraud.DetailsI’m interested in better understanding the base rates of fraud in high-growth companies. YCombinator is a convenience sample for “high-growth companies”, as they are relatively public about who they back, and act as a filter for e.g. “obviously fraudulent” companies.I was able to find 3 companies which closed due to (alleged) fraud, two more which had their business substantially impacted by fraud claims, and three which had mild business impacts from fraud claims.YCombinator has incubated 3,951 companies, which gives a naïve rate of ~0.1% of companies having major allegations of fraud.I estimate that there are around 400 YCombinator-incubated companies with a valuation over $100M. 3 of the 5 companies with major fraud had $100M+ valuations, implying that 3/400 = 1% of $100M+ companies have major fraud charges. I think that this 1% number is probably more useful than the previous 0.1% number, because I expect that many smaller companies were fraudulent but no one bothered to charge them or report on it.I also wouldn’t be surprised to learn if I missed some cases, though I’d be surprised if I missed more than half of the $100M+ cases.So overall, I estimate that maybe 1-2% of $100M+ YCombinator-backed companies have faced serious charges of fraud.Additional CommentsIt’s notable that almost half of the companies on this list are financial services, which I believe makes them overrepresented.I expect that YCombinator is better at filtering out fraudulent companies than other angel investors, but they are also more likely to generate highly valuable companies. I’m not sure how these factors balance out, but would guess that they are roughly equal, implying that 1-2% of all high-growth $100M+ companies face serious fraud charges.DataCompanyValuationSeverityNotesuBiome$298MFatal“the company shut down in 2019 following an investigation into possible insurance fraud. Since 2021, the FBI has considered [the founders] to be fugitives.” (Wikipedia)LendUp$500MFatal"We are shuttering the lending operations of this fintech for repeatedly lying and illegally cheating its customers," said CFPB Director Rohit Chopra. (Reuters)Stablegains$6-15MFatalInvested customer funds into a cryptocurrency which collapsed. Customers allege this was deceptive, though I can’t find any evidence of them actually being charged (yet). (The Defiant)Synapsica$8-20MMajorTwo cofounders charged with defrauding the third and other investors. 1/3 of employees were laid off, which the company claims is unrelated to the fraud charges.Flutterwave$3BMajorAssets frozen over claimed violations of anti-money laundering laws. The company denies misconduct and seems to still be operating at a large scale.I am unfamiliar with the Nigerian legal/financial system, and it’s unclear to me how serious these charges are.Bikayi$21-50MMildSalespeople forged signatures of customers. It looks to me like the company separately encountered financial trouble and this fraud in particular was maybe just used as a cover to fire people.Momentus$65MMildSEC settled charges that the CEO misled investors about his immigration status and the results of a test of their technology during an attempt to take the company public. The company has now successfully gone public; my impression is that the CEO was fired but otherwise the company is fine.Modern Health$1.2BMildOne cofounder sued the other for defrauding investors by not disclosing incentives provided to customers which may have boosted sales.It seems like few media venues have picked up on the story, and so far the impact on their business seems mild.Dreamworld$1....