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Fraud and exaggeration in the tech startup space

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Bravado is inherent to the tech startup culture. Entrepreneurs are, after all, trying to sell you something. Nobody wants to invest in a company founder who promises to restrict their thinking to inside the box while ensuring the envelope remains intact. Outright falsehoods delivered via unsupported exaggeration, however, are problematic.

The latest tech company facing these types of fraud allegations is Nikola Corp., a startup that has pitched battery- and hydrogen-powered technology in trucks. The SEC is reportedly investigating after claims the company greatly exaggerated the capabilities of some of its test vehicles. Nikola has denied the allegations.

The story, however, should serve as a reminder to anyone considering an investment in the tech startup space.

Overstating the obvious

As tech insiders dive deeper and deeper into unexplored territories, the potential for deception increases. The level of expertise needed to understand the foundations of these bold claims is beyond most casual observers and investors. This gap can be exploited, whether intentional or unintentional.

The Theranos case may be the most high-profile example of a founder’s claims allegedly not lining up with reality. Still, there is a litany of evidence this type of behavior may be more widespread. As The Next Web points out, one study found 40% of artificial intelligence startups didn’t use A.I. In addition, quantum computing companies pulled in $450 million in private funding from 2017-18, even though it’s unclear whether the technology will ultimately grow into a viable product.

Metrics may seem like a concrete way to measure important factors, but even these can be manipulated. Facebook, Google, Uber, Snapchat and Twitter have all faced questions about their calculations.

The line between an exaggeration for the sake of a sales pitch and outright fraud is razor-thin. There are various factors that can influence this determination and, consequently, whether you can hold the responsible party legally accountable.