In the high-stakes world of startup funding, where millions can be raised in a matter of weeks and valuations shift with a pitch deck, due diligence (DD) has long been the safety net that prevents bad bets.
It’s a well-worn and trusted process, particularly in venture capital. So when an investor alleges fraud after a $10.4 million investment has been made, it sends shockwaves through the ecosystem.
Such disputes are rare, but when they occur, they expose just how extraordinary the situation must be to override the typically rigorous systems that underpin venture capital investing.
In a standard raise, professional investors—especially VC funds—come armed with experienced advisors, lawyers, and accountants. The documentation is dense, the checks exhaustive, and the scrutiny intense. Investors receive detailed warranties about everything from company ownership structures and historical financials to intellectual property and employee agreements.
Misrepresentations are covered by legal remedies; if anything turns out to be false, the path to civil litigation is clear.
This is precisely why post-investment drama is so uncommon. Buyer’s remorse, in the VC world, rarely makes it to the courtroom. Most investors, having conducted extensive DD. The share subscription documentation would usually contain extensive warranties about the company, its performance, what it owns and what it has done.
The warranties would also extend to warranting the accuracy of the information that had been provided to the investor prior to the investment. The subscription agreement acknowledges their risk in subscription agreements—accepting that they’ve relied on their own judgement.
If something does go awry, the usual course is a private, contractual dispute. Suing for breach of warranty or misrepresentation is the conventional route, not a criminal investigation.
Which makes it all the more compelling when things escalate into police complaints, public allegations of fraud, and court orders.
Fraud, after all, is not just a commercial issue—it’s a crime. And making out a case of criminal fraud in Australia is far from straightforward.
The evidentiary bar is deliberately high, as it should be, because the consequences are severe. Depending on the jurisdiction, someone convicted of fraud could face up to 20 years in prison.
To prove fraud, a number of strict elements must be satisfied. The accused must have engaged in deceptive conduct, and that conduct must be deemed dishonest by the standards of ordinary people—and the accused must have known it was dishonest.
The fraud must result in a tangible benefit—typically property or financial advantage—and there needs to be a clear, causal link between the deception and the benefit obtained. It’s not a matter for civil courts to decide—it’s for police and prosecutors. And it involves a significant investigative process: complaints, collection of evidence, legal briefings, and prosecutorial review.
Given these hurdles, allegations of fraud in startup investing are exceedingly rare. Most instances of poor financial hygiene—whether they be bookkeeping errors, projections that failed to pan out, or even aggressive growth assumptions—don’t cross the line into criminal conduct.
Burch&Co founder Nich Burch
If due diligence has been properly conducted, the risk of major deception being missed is low. That’s the point of DD: to detect and defuse those risks before money changes hands.
For founders reading about cases like this, the natural question is whether they should be worried. The answer is simple: only if they’re actively misrepresenting material facts. If a founder has a reasonable basis for every factual claim in their pitch—market size, run rate, pipeline, historicals—then they’re on solid ground.
The law doesn’t expect perfection, just honesty and good faith.
As for investors, will this kind of saga trigger more rigorous due diligence processes in the future? Unlikely.
While this case has grabbed attention, it appears to be an outlier—hence the fascination. Most DD processes in venture capital are already sophisticated and thorough.
In fact, they’re often criticised for being overly time-consuming and costly, especially when applied to early-stage ventures that are still building product-market fit.
We might, however, see a slight shift in how certain early-stage investments are structured. Rather than large equity placements upfront, investors might lean toward instruments like convertible notes or SAFEs (Simple Agreements for Future Equity), which delay valuation discussions and offer more flexibility.
These vehicles are popular precisely because they allow for faster capital deployment with fewer upfront obligations—while still offering protection.
And what happens if, after all the drama, there’s still money left in the company? Who gets it? Here, the law is fairly settled. Shareholders, including those who feel duped, are generally at the back of the queue.
First in line are the company’s secured creditors—those with security interests over assets. Next come unsecured creditors.
Only after those debts are cleared (if there’s anything left) do shareholders receive any return. While there are ‘proceeds of crime’ provisions that allow the state to seize tainted assets, they don’t guarantee restitution for the victim. In most cases, a conviction punishes the perpetrator—it doesn’t make investors whole.
It’s a sobering reminder that even with rigorous diligence, investing in start-ups carries risk. Not just the commercial kind, but the human kind—because trust is always a factor.
Founders trust investors not to undercut them. Investors trust founders not to mislead them.
And the entire ecosystem depends on that mutual trust, underpinned by clear documentation and professional DD.
The real takeaway? This kind of case gets headlines precisely because it’s so rare.
It punctures the assumption that smart people, experienced funds, and airtight documents are always enough.
But instead of causing panic or sweeping changes, it reinforces a quieter truth: that venture investing is as much about people as it is about numbers.
And that sometimes, even the best systems can be outwitted—at least for a while.
- Nich Burch is a director of commercial law firm Burch&Co
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