Fraud Detection Signals

Based on the discussion between Shaan Puri, Sam Parr, and Anand Sanwal, there are several key signals that can indicate potential fraud or company issues, particularly in high-growth or highly valued companies.

• Red Flags in Company Structure:

  • Convoluted organizational structures that are hard to understand
  • Multiple entities borrowing money from each other
  • Complex cap structures being praised as "innovative"

• Leadership Warning Signs:

  • High CFO turnover (rotating door of CFOs every 3-6 months)
  • Unusually young executives in critical positions
  • Promoting inexperienced people to senior roles quickly
  • Leadership team filled with friends/cronies rather than experienced professionals

• Narrative-Based Red Flags:

  • Focus on founder personality over business fundamentals
  • Excessive attention to lifestyle choices (clothing, living arrangements)
  • When the innovation is in financial structure rather than product
  • Companies that innovate in HR practices rather than building product

• Hidden Performance Issues:

  • 3x liquidation preferences in funding rounds
  • Frequent turnover of C-suite executives (CRO, CMO leaving every 6 months)
  • Extreme operational metrics (like FTX's 25 engineers claim)
  • When positive and negative interpretations of the same signal emerge:
    • What looks like "genius" during growth can look like "recklessness" after failure
    • "Meritocracy" can later be revealed as "cronyism"
    • "Operational efficiency" might actually be "underinvestment"

• Communication Patterns:

  • CEOs may feel compelled to maintain positive messaging even in trouble
  • Cannot admit weakness as it could accelerate company's demise
  • Use of "industry standard" phrase to justify questionable terms