By: Dr. Azian Madun
IN the dynamic world of start-ups, particularly those supported by public funding, maintaining transparency, accountability, and ethical conduct is essential. Statistics in the United States show that the road to success for start-ups is fraught with challenges – nearly 50% failing within the first five years, and 65% within the first ten years (Forbes, October 2024), highlighting the inherent risks in the start-up and the importance of strategic planning and financial management.
The case of FashionValet, a Malaysian e-commerce start-up, illustrates how the scrutiny of public funding requires diligent oversight to avoid allegations of misconduct. At the same time, it underscores the need for the government to support young Malay entrepreneurs. Ensuring these entrepreneurs have access to public funding, while balancing risk and accountability, is vital to addressing historical inequalities, promoting economic inclusivity, social cohesion, and national resilience.
When start-ups fail, the process of proving misconduct can be lengthy and complex, often resulting in reputational damage, operational disruption, and personal stress for founders.
Meanwhile, funders, including government agencies and public investment bodies, face challenges in ensuring that public funds are allocated responsibly. The Responsibilities of Start-Up Founders Using Public Funds Start-up founders who receive public funding must act with the highest levels of transparency and integrity. Their actions and decisions can determine whether a business failure is perceived as an honest setback or misconduct warranting prosecution.
1. Transparency and reporting are critical for founders using public funds. They are responsible for providing clear, accurate, and timely updates on the use of funds, project milestones, and challenges faced. Regular reporting to government bodies and public stakeholders helps maintain accountability and
trust.
2. Ethical financial management ensures that public funds are used strictly for their intended purpose. Founders must avoid any personal use of funds or
misappropriation. Even unintentional mismanagement can lead to allegations of misconduct, which may trigger lengthy investigations.
3. Compliance with regulations is a fundamental duty for founders. They must adhere to all legal and regulatory requirements, such as financial reporting,
taxation, and employment laws. Maintaining detailed and accurate records is essential to demonstrate compliance during audits or investigations.
4. Setting realistic goals and deliverables is necessary to manage expectations. Overpromising or exaggerating the potential of the business can be seen as
misrepresentation if the start-up fails to deliver. If a strategic change is required, founders should communicate this transparently to funders and stakeholders.
5. Ethical leadership within the business is crucial for fostering a culture of integrity. Founders must ensure that their teams understand the importance of ethical conduct, particularly when managing public funds.
The responsibilities of funders managing public money
Funders, such as government agencies or public investment bodies, play a pivotal role in overseeing how public funds are allocated and used. Their diligence helps prevent misconduct and ensures that public investments are managed responsibly.
1. Rigorous due diligence is essential before disbursing public funds. Funders must thoroughly evaluate the start-up’s business plan, financial health, and the founders' backgrounds to assess potential risks and ensure credibility.
2. Active oversight and monitoring are necessary throughout the funding period. Funders should require regular financial reports, progress updates, and
independent audits. This ongoing engagement helps identify potential issues early and ensures that funds are being used appropriately.
3. Transparent funding processes are key to maintaining public trust. Funders must ensure that the allocation of public money is fair, merit-based, and free from conflicts of interest. Disclosing information about substantial funding decisions and outcomes promotes accountability.
4. Prompt action on misconduct is critical when irregularities are detected. Funders should not hesitate to intervene, suspend funding, or initiate
investigations to protect public interests.
Why proving misconduct in start-ups takes a long time
When allegations of misconduct arise in start-ups, the process of proving these claims and pursuing prosecution can be lengthy and complex due to several factors. For instance, in the case of Theranos, allegations of fraud and misrepresentation emerged in 2015, but the investigation, trial, and eventual conviction of founder Elizabeth Holmes were stretched until 2022. Similarly, Nikola Corporation faced accusations in 2020 of misleading investors about the capabilities of its electric trucks, leading to the conviction of founder Trevor Milton in 2022 after a prolonged legal process.
These cases illustrate how the need for detailed financial analysis, expert testimonies, and adherence to due process can significantly prolong the resolution of allegations.
1. Complicated financial investigations are often required to trace the use of public funds. Start-ups, particularly those with intricate accounting systems or multiple funding sources, may have financial records that require months or years to analyze. Forensic accountants and auditors must carefully review every
transaction to uncover potential mismanagement or fraud.
2. Legal procedures and due process ensure that individuals accused of misconduct have the right to a fair trial. The legal process involves multiple
stages, including initial investigations, the filing of charges, pre-trial hearings, the trial itself, and potential appeals. Each stage requires time to gather evidence, prepare arguments, and follow legal protocols.
3. Coordination across jurisdictions can complicate investigations when start-ups receive funds from multiple governmental bodies. Different regulations, legal frameworks, and bureaucratic processes can delay the investigation and prosecution timeline.
4. Obstruction and concealment by those involved in misconduct can further extend the process. Efforts to hide evidence, falsify records, or obstruct justice
require investigators to spend additional time uncovering the truth.
5. Resource constraints faced by regulatory bodies and law enforcement agencies also contribute to delays. Limited personnel, funding, and a backlog of
cases can slow down investigations, particularly in complex financial cases.
Impact of prolonged prosecution on start-ups and public trust
The lengthy process of proving misconduct in publicly funded start-ups can have far-reaching consequences. For founders, the accusation of misconduct can lead to severe reputational damage that extends beyond the professional sphere, affecting personal relationships and future career opportunities. Even if the allegations are eventually proven false, the stain of suspicion can linger, making it difficult to rebuild trust with investors, customers, and the broader business community.
Operational disruption is another significant consequence, as the founder may be forced to step back from daily management, leaving the company in disarray. Employees may lose confidence in leadership, and business partners may distance themselves to protect their own reputations. This disruption often results in a loss of momentum, missed business opportunities, and stalled innovation, which can be fatal for start-ups that rely on rapid growth.
On a personal level, the emotional and psychological toll can be immense. Founders often experience high levels of stress, anxiety, and burnout as they navigate legal battles and public scrutiny. The strain can affect their health, family life, and overall well-being. Legal fees, combined with the potential loss of income, can lead to significant financial burdens, impacting their personal finances and long-term security.
Prolonged investigations also mean that the cloud of uncertainty hangs over them for years, making it difficult to plan for the future. Even if they are eventually cleared of wrongdoing, the process can leave them feeling disillusioned and hesitant to pursue new ventures. In some cases, the fear of being wrongly accused again may discourage talented entrepreneurs from re-entering the start-up ecosystem, depriving the industry of innovative ideas and leadership.
As for funders and government agencies, delays in resolving misconduct cases can significantly erode public confidence in their ability to manage taxpayer money. When investigations drag on without clear outcomes, the public may begin to question whether these authorities have the competence, efficiency, and commitment required to uphold ethical standards. This uncertainty can give rise to perceptions of negligence, inefficiency, or complicity, further eroding faith in public institutions.
The perception that wrongdoing goes unpunished or is addressed too slowly can create a sense of injustice among taxpayers and stakeholders. People may feel that public funds are not being safeguarded, and that those in positions of power are not held to the same level of accountability as ordinary citizens. This sense of unfairness can lead to public frustration, disillusionment, and skepticism toward government agencies, making it harder to justify future investments in start-ups or other publicly funded initiatives.
Furthermore, when trust in the authorities is compromised, it can have a ripple effect throughout the start-up ecosystem. Investors, entrepreneurs, and innovators may become wary of participating in government-backed programs if they believe that oversight mechanisms are weak or ineffective. This hesitation can suppress entrepreneurial activity and deter promising ventures from seeking public funding, ultimately slowing down innovation and economic growth, especially among Malay entrepreneurs.
In addition, a lack of trust in public institutions can lead to calls for increased regulation and oversight, which may burden start-ups with additional bureaucratic processes. While accountability is essential, excessive red tape can make it harder for new businesses to thrive, reducing the appeal of public funding. This can create a vicious cycle where fewer start-ups apply for government support, limiting the potential benefits that public investments in innovation can bring to society.
Conclusion
In publicly funded start-ups, the roles of founders and funders are crucial in maintaining transparency, accountability, and ethical conduct. Founders must manage public funds responsibly, communicate openly, and comply with all legal requirements to avoid the risk of misconduct allegations. Funders must conduct thorough due diligence, maintain active oversight, and act decisively when issues arise.
Given the lengthy and complex nature of proving misconduct, it is essential to foster a culture of integrity and proactive accountability. By doing so, start-ups can navigate challenges responsibly, protect public trust, and ensure that public resources are used effectively for the greater good.
The writer is a Senior Lecturer Department of Syariah & Management Academy of Islamic Studies, Universiti Malaya.
