Why Founders Should Care as Much About Fraud as Fundraising
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Tech founders care about their fundraising. They perfect their pitch to investors, announce the completed round to journalists, and vet the fundraising data aggregated into databases like Pitchbook and Crunchbase. The care which founders give to their fundraising is a marked contrast to the care with which they practice financial due diligence. Early-stage ventures, in short, are not bastions of corporate governance. When you are growing so fast - or at the very least, trying to grow so fast - exercising best practices in accounting, finance, and admin is probably not at the top of your to-do list.
But these practices should be a much higher priority. A lapse in corporate governance can often lead to fraud, resulting in catastrophic consequences. One such example comes to us the way of Austin, Texas. From its base in the Texan city, fintech startup Mozido promised to provide white-labeled financial solutions for emerging markets in India, Africa, and Southeast Asia, earning a US$2.3-billion valuation along the way. But the unicorn was really a wolf in sheep’s clothing. It was soon uncovered that founder Michael Liberty was using shell companies to divert funds from the company to his personal bank account. Faced with over 10 federal fraud charges, Liberty - if his surname could not be any more ironic - may be sentenced up to 20 years in prison on February 2020.
The Mozido situation could have been easily avoided. Proper finance and accounting procedures would have prevented anyone - yes, even the founder - from doing something as unscrupulous as putting VC funds into dummy companies. Corporate governance, after all, does not only protect the people at the top. By their very nature of asking everyone to comply with specific procedures and processes, corporate governance casts protection across all internal stakeholders and even those external, such as the investors who unfortunately backed Mozido.
As the Mozido case shows, when fraud occurs, it is usually not a minor issue, but a catastrophic one. At best, it can result in non-negligible losses to the company; at worst, it can bankrupt the entire venture. The question then becomes :Why? If the stakes of poor finance and accounting are so high, why do founders - at least those from a non-finance background - routinely ignore this domain? The answer, of course, is what governs the decision-making of all founders across the world: time.
Founders think the time it takes to invest in building proper finance and accounting procedures from the very start is simply not worth it. This thinking manifests in some ways that are mostly benign, such as delaying official registration of the business, to the potentially disastrous, such as using the same bank accounts for both their business and personal life. In some sense, they are right. The chances of something truly catastrophic occurring, like Mozido, are slim. So in most cases, entrepreneurs are indeed better off focusing on product development, sales, marketing, or any of the myriad domains they have to address - it is not just worth the founder's time in the beginning.
The operative word in that sentence is founder. Even if they do not necessarily spend their time on finance and admin set-up during the early stages of their venture, someone should. There are, after all, a whole list of things that founders should tap external partners for, and I would argue that there is none better suited for this list than finance, accounting, and admin.
No matter how skilled you are, there will always be a greater benefit in having a partner to mind these matters, so you can focus more on your core competencies.
You have a wide choice in this regard. There are freelancers, consultants, small businesses, enterprises, or even financial concierges. When speaking to prospective clients, the biggest question for them is not deciding between one external agency, and another, but between trying to handle the function in-house or partnering with an external resource. Founders should focus on fundraising, while we, companies like FullSuite, and other financial concierges, should focus on fighting fraud.