In the wake of the Theranos scandal, some commentators have asked whether entrepreneurial companies are particularly inclined to deception and downright fraud. Startups are often focused on disrupting existing markets, occasionally bending the rules while doing so. Their employees need to overcome demanding challenges, including the need to draft processes and responsibilities from scratch. In short, countless firms face strong pressures and tempting incentives to deceive.
But are they also more likely to be deceived themselves? After all, they have to forge business relations with potential customers, suppliers, and investors, all of whom are considerably more powerful and sophisticated than the startup. Recently, our team interviewed 40 founders and venture capitalists and conducted two experiments to uncover whether startups, compared to more mature firms, are more likely to be the victims of fraud.
In our experiments, performed with Christian Schlereth at WHU – Otto Beisheim School of Management and Craig R. Carter at Arizona State University, we simulated a negotiation episode between two firms. The buying firm, a tablet manufacturer, was interested in procuring an innovative hard disk drive model. We recruited 250 experienced purchasing and sales managers and allocated them between the experiments. In one, participants were sellers for the hard disk maker. In the other, participants were buyers for the tablet manufacturer. We divided each study’s sample into three sub-groups: We informed the first group that the firm they were negotiating with (that is, their counterpart’s employer) was a startup. The second group was negotiating with a mature firm. The third group did not receive any information regarding firm age (our control condition).
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