Those developments follow the February arrests of Carlos Watson, the founder of Ozy Media, and Christopher Kirchner, the founder of software company Slync, both accused of defrauding investors. Still to come is the fraud trial of Manish Lachwani, a co-founder of the software startup HeadSpin, set to begin in May, and that of Sam Bankman-Fried, the founder of the cryptocurrency exchange FTX, who faces 13 fraud charges later this year.

Taken together, the chorus of charges, convictions and sentences have created a feeling that the startup world’s fast and loose fakery actually has consequences. Despite this generation’s many high-profile scandals (Uber, WeWork) and downfalls (Juicero), few startup founders, aside from Holmes, ever faced criminal charges for pushing the boundaries of business puffery as they disrupted us into the future.

The funding downturn may be to blame. Unethical behavior can largely be overlooked when times are good, as they were for tech startups in the 2010s. Between 2012 and 2021, funding to tech startups in the United States jumped eightfold to $344 billion, according to PitchBook, which tracks startups. More than 1,200 of them are considered “unicorns” worth $1 billion or more on paper.

But when the easy money dries up, everyone parrots the Warren Buffett proverb about finding out who is swimming naked when the tide goes out. After FTX filed for bankruptcy in November, Brian Chesky, CEO of Airbnb, updated the adage for millennial tech founders: “It feels like we were in a nightclub and the lights just turned on,” he tweeted.

In the past, the venture capital investors who backed startups were reluctant to pursue legal action when they were duped. The companies were small, with few assets to recover, and going after a founder would hurt the investors’ reputations. That has changed as the unicorns have soared, attracting billions in funding, and as larger, more traditional investors including hedge funds, corporate investors and mutual funds have entered the investing game.

“There is more money at stake, so it just changes the calculus,” said Alexander Dyck, a professor of finance at the University of Toronto who specializes in corporate governance.

The Justice Department has also been urging prosecutors to “be bold” in its pursuit of more business frauds, including at private startups. Thus, charges for founders of Frank, Ozy Media, Slync and HeadSpin and expectations of more to come.

IRL, a messaging app that investors valued at $1 billion, is being investigated by the Securities and Exchange Commission for allegedly misleading investors about how many users it had, according to reporting from The Information. Rumby, a laundry delivery startup in Ohio, allegedly fabricated a story of financial success to secure funding, which its founder used to buy himself a $1.7 million home, according to a lawsuit from one of its investors.

News outlets have also reported unethical behavior at startups including Olive, a $4 billion health care software startup, and Nate, an e-commerce startup claiming to use artificial intelligence. A spokesperson for Olive said the company has “disputed and denied” the reported allegations.

All of this creates an awkward moment for venture capital investors. When startup valuations were soaring, they were seen as visionary kingmakers. It was easy enough to convince the world, and the investors in their funds — pension funds, college endowments and wealthy individuals — that they were responsible stewards of capital with the unique skills required to predict the future and find the next Steve Jobs to build it.

But as more startup frauds are revealed, these titans of industry are playing a different role in lawsuits, bankruptcy filings and court testimonies: the victim that got duped.

Alfred Lin, an investor at Sequoia Capital, a top Silicon Valley firm that put $150 million into FTX, reflected on the cryptocurrency disaster at a startup event in January. “It’s not that we made the investment, it’s the year-and-a-half working relationship afterwards that I still didn’t see it,” he said. “That is difficult.”

Venture capital investors say their asset class is among the riskiest places to park money but holds the potential for outsize rewards. The startup world celebrates failures, and if you’re not failing, you’re viewed as not taking enough risks. But it is unclear whether that defense will hold as the scandals become more humiliating for everyone involved.