Can the tech industry be trusted to police itself? ‹ CrimeReads

I spent most of my career in Silicon Valley. In my 25 years in tech, I’ve done everything from a two-person, seed-stage startup, to a 40,000-employee, publicly traded company. Mostly, I’ve worked at companies between those extremes—venture-backed tech startups that have raised millions of dollars in financing but are still private companies.

The reality of these private, venture-backed companies is that they operate largely without regulation.

Usually this is good. Certainly, the companies I’ve worked for have all been run ethically and legally—except, of course, MCI, which WorldCom had the bad luck to buy in 1998 and was later found guilty of one of the greatest securities frauds of all time. WorldCom is held because it is a public company controlled by the public market. But it always struck me as a curious question: Who gives private companies that control?

While billions of dollars in venture capital support thousands of venture-backed startups each year, the question of who is responsible for ensuring that privately funded companies comply with the law is still a gray area. For the most part, the answer is the companies themselves.

Unless founders and executives can be trusted to follow their own moral compass, such self-regulation has two main guards.

1. Lawyers – When they can afford it, startups hire lawyers to give them advice. This investment is more to avoid civil liability than criminal. The threat of prosecution theoretically discourages bad behavior. But the number of interested parties in the startup is small, so the risk of legal action is usually low.
2. Board Members – Early stage companies are expected to have a board of directors. But those boards are almost always comprised of and controlled by the founders and investors themselves, with no independence or neutrality. In other words, foxes guarding the hen house.

Unless a company is in a highly regulated industry such as healthcare, there is no active monitoring by government law enforcement. In most cases, such self-regulation works well – businesses operate ethically and legally. But, when they are not. . . what happens? Private companies often fall through the cracks of our criminal system—typically irrelevant to local or state law enforcement, but not really under the control of federal authorities. Occasionally, criminal activity is exposed by the media or by a driver, forcing law enforcement to become involved. However, in most cases, if a crime is being committed, there is no one to investigate or arrest the perpetrators.

In my novel, Bit FlipI will explore this exact vulnerability. As Sam Hughes, the protagonist who suspects fraud at the company, explains, “Who is going to report this financial scandal. to the? Was this technically a crime, given that it was still a private enterprise? He thought for a moment about the blank stares he would get from the Palo Alto Police Department. Can some founder lie to rich VC investors about their income? No, this was a job for the Federation. But which “federal”? SEC? The FTC? FBI? Who even bothers to investigate?”

White collar crimes do not receive much attention in the literature. True crime murders, violence and serial killings receive a disproportionate amount of attention. However, with billions of dollars of private assets on the line, the incentives to commit white-collar crime can be extremely challenging – and often provide the primary motivation and/or license for more heinous criminal acts.

In fact, some of the biggest business scandals in recent years have involved private technology companies, many of which have been well documented in fiction books. Blatant investor misinformation and outright product fraud from Tyrone (mostly exposed in John Carrey’s excellent report and subsequent book). bad blood), to extensive self-hosting and WeWork’s questionable accounting (well-handled). Our culture by Elliott Brown and Maureen Farrell), to reckless business practices and Uber’s rampant sexual misconduct (compulsorily documented). Super pumped by Mike Isaac) These incidents and dozens like them show what can happen when unethical founders are allowed to run away with billions of dollars.

And, apparently, audiences can’t get enough of this kind of white-collar crime story. In addition to widespread media coverage and several best-selling non-fiction books, these scandals have become TV shows and movies. Whether in their everyday equanimity or plain old schadenfreude, such scandals are compelling because of the gray area of ​​crime. Unlike the psychotic killer, the criminals in these stories cannot identify an act when their actions break the law. They are smart and ambitious, but also entitled and self-deluded – sliding down a slippery slope until things take a turn for the worst. In fact, criminal charges are rare.

The tech industry term “unicorns,” which refers to private companies valued at more than $1 billion, was originally coined to describe how rare this phenomenon is. Previously, most companies at that valuation would be public. Today, according to TechCrunch, there are more than 1,300 unicorn companies with a combined market value of more than $4 trillion. Many of these companies have remained private specifically to avoid the additional scrutiny and reporting requirements of a private company. The exact conditions under which white-collar crime flourishes. Especially if the money that has made it easy to hide wrongdoing over the last decade is gone, many of these companies will no doubt be hiding similar criminal scandals.

A major part of the tech industry’s appeal is the lack of regulations, as the first semiconductor boom gave Silicon Valley its name. Like the Wild West, the most daring, aggressive and disruptive companies take the lion’s share. Silicon Valley folklore is rich with stories of renegade founders who ignored conventional wisdom and broke the rules, creating massive success for their companies and unimaginable fortunes for themselves and their investors. This hallowed history fueled the tech industry’s speculative growth from the dot-com boom to today.

But with 7 out of 10 billionaires making their fortunes from the tech industry, the narrative of a benevolent, self-regulatory industry “making the world a better place” is outdated. The self-serving, all-costs culture of private, venture-backed companies thrives — even when those companies are near monopolies. And once they are behemoths, they are hard to stop. It’s time to stop trusting the tech industry to police it. In the meantime, these scandals continue to make great stories.

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