Startups Are More Vulnerable to Fraud. Here’s Why.

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In the wake of the Theranos scandal, some commentators have asked whether entrepreneurial companies are particularly inclined to deception and downright fraud. Startups are often focused on disrupting existing markets, occasionally bending the rules while doing so. Their employees need to overcome demanding challenges, including the need to draft processes and responsibilities from scratch. In short, countless firms face strong pressures and tempting incentives to deceive.

But are they also more likely to be deceived themselves? After all, they have to forge business relations with potential customers, suppliers, and investors, all of whom are considerably more powerful and sophisticated than the startup. Recently, our team interviewed 40 founders and venture capitalists and conducted two experiments to uncover whether startups, compared to more mature firms, are more likely to be the victims of fraud.

In our experiments, performed with Christian Schlereth at WHU – Otto Beisheim School

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