Why do VCs love frauds so much?

There's a lot of blind momentum-chasing and FOMO in this industry. Companies that are showing big-time "up and to the right" (whether accurate or not) are in high demand and can basically dictate their own terms as far as scope of diligence, time to close, etc. (i.e. as little as possible). A lot of VCs would rather just take a flier on something they don't fully understand than miss out on that upside. 

Having spent time in VC I would say the issue is that the entire focus during investment memo creation / IC presentations is on the future / TAM expansion / etc as opposed to the present. So when you have a business in a hot space with potential to 10x the rounds become so crowded that you end up moving quickly at the expense of popping the hood.

DD on the existing form of the business is outsourced to lawyers and consultants who don’t care in the same way, and VCs accept that any red flags are a part of the high risk of the investment stage. I will caveat by saying I do strongly believe you are not a good VC investor if you don’t have any zeros in your portfolio.

Also, +1 for the sex positive plugin.

I think Bill Gurley said VC's aren't in the home run business, they're in the grand slam business.  As such, they're incentivized to back folks that have a slightly better chance of giving them that decacorn outcome. Oftentimes, those types of people are a mix of visionary / sociopath / loose moral framework.  I.e., take giant shots, and figure out the back end later... this often closely treads the fraudulent line.   

Much of this revolves around cult of personality…balance being weird, while super ambitious, and sounding smart, even with a crappy idea/product then you can raise money. The names mentioned above all raised from top tier funds. 

It is actually pretty simple.

VC isn’t actually about building good businesses. It is about creating liquidity events at a scale that allows the VC to make a certain return. Because VC is VC, these businesses basically have 0 track record when VC makes the investment (I know this changes a little bit at the growth equity stage but put them to the side for now). All VCs really have to go off of is perception.

Perception being so directly the primary driver of value will lead to a lot of fraud.

Definitely agree that VC business model is based around the 5% that do extremely well. Ultimately fraudsters will fall through the cracks and get funding.

I do think it’s worth pointing out that though that these sorts of things aren’t unique to the VC industry. MBS and the 08 crash was in part due to securities fraudulently being solid as low risk to banks who didn’t do any DD. So getting duped happens in “traditional” high finance as well.
 

Because VCs themselves are fraudsters as well. 

Low IQ day dreamers with far fetched visions that masturbate on Linkedin with cringey stuff.

University courses on entrepreneurship teach that the main indicator of a start-up's success is the founder's motivation and attachment to the project above anything else, so this may also help spread fraud. As a matter of fact, I did a course on entrepreneurship during my degree and I've never heard the term 'accounting'.

So I'd say that VCs follow some rules that go completely in opposite directions from conventional business norms. Because it's a relatively new field compared to investing in traditional businesses, I think we need more time until better practices, policies, and regulations surrounding VC appear.

So we can live rent free in your head

VC people aren’t really investors like a PM at citadel or at a mega single manager hedge fund. They are just glorified salesman. I’ve learned most people are just sales people selling an idea to the next dumb salesperson. 

First, I'd say you're listing a handful of high profile companies that did commit fraud and not comparing it to the amount of companies with VC backing that are fraud. Not saying every venture works out, but most know its very hard to commit fraud in the long run. 

If you watch the HBO docu on Thernanos, they start by saying most founders have some type of fraud when they start, essentially, the boat is close to the dock but not at the dock. I believe they mention that Thomas Edison got funded but didnt have the light bulb completely worked out and even Steve Jobs when he first presented the iPhone had to keep putting down and picking up new ones because they would crash. I'd admit that it seemed strange on Thernaos end because they would trying to make a product that looked like it would never work; where as, though FTX was clearly in the wrong, if they kept raising funds they may have been able to straighten it out over time (but they also seemed like idiots so prob not.)

Second, I'd say in conjunction with my first point and somewhat rhyming with what people said above, most people investing at that level are investing more in a story/idea and expect some to go to zero. Take FTX, I guess  you can do a super deep dive into their accounting and audit the whole thing, but that should really come after you understand crypto trading; its great if they match debits to credits, but if the product doesn't have a run way then its not going to happen. 

Third, I would say most VCs ultimately go back to a very high level of wealth, where at a point there's probably a very blurry line between legal/illegal. I'd also say (without any knowledge first hand) probably most start ups (and companies as a whole) are doing some type of fraud, so it comes with the territory.

4 words: Low interest rate environment. Read "Price of Time' , and you will see why VC's are asinine in this regard. They are incentivized to do so because of the Fed's policies in the last 13 years. 

a lot of VCs are idiot lemmings. Also the pace at which capital was being deployed circa 2021 was so insane that many forwent proper diligence to close deals b4 a tiger / a16z came in and outbid them.

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Yes, in the venture capital industry we often see situations where money is invested in projects of dubious value or even dubious legality. This may be due to various factors, including the ability of scammers to sell themselves, attract attention to their projects and manipulate the media picture. Industry trends also play a role, where investors may follow fads rather than carefully analyze the fundamental aspects of the business. The success of a project is not always related to its real value or prospects, and in some cases, investors can be deceived by shiny promises and hype around the project.