Start-ups are raising more money, and the industry is growing. That growth is real – nobody in the industry could doubt that. But those massive funding rounds you’ve read about? Many of them are fake.
That’s the allegation put forward in a report from Chinese news site Tencent Tech, which says that 80% of the country’s start-ups are lying about their funding rounds. The article quotes famed Chinese investor and Zhenfund founder Xu Xiaoping as saying that phony funding numbers are “a new kind of tacit understanding in the industry.”
Generally speaking, it’s very difficult for the media to verify whether or not a start-up is telling the truth when it has raised a funding round. But verification of earlier rounds can be possible when a Chinese company lists on the American stock market because the US Securities and Exchange Commission (SEC) requires them to disclose several years of securities issuances history. Since lying about the numbers there could derail your entire IPO and legal status in the US, companies
are unlikely to do it. That means that SEC filings are a source of accurate, verifiable information about how much companies
really raised in previous rounds.
The Tencent Tech article used this approach to name some companies
whose announced rounds don’t seem to line up with the paperwork. An independent investigation by Tech in Asia found that while in some cases Tencent Tech had made mistakes or the situation wasn’t entirely clear, several major US-listed Chinese tech firms do have major discrepancies between the fundraising they announced and the funding they reported to the SEC.
But the problem of false funding numbers goes deeper than just lying start-ups. Tech in Asia also found that errors on the part of the media led to instances where inflated rounds were widely reported and accepted as accurate.