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Why did VCs overlook Hampton Creek fraud?

Yesterday I read a very interesting piece covering the alleged fraud conducted by the founder of Hampton Creek by doing buybacks of their product and then misrepresenting this initiative as sales with investors. The company raised millions in financing from the likes of Khosla Ventures or Founders Fund. However, when board members were made aware of a potential fraud they looked the other way. Look forward to hearing some of your opinions in this regard. The piece on Bloomberg can be found here.

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Alicia Robb
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Alicia Robb Advisor
Senior Fellow at Kauffman Foundation
I think you meant: why did VCs overlook Hampton Creek...

It's a great question. One I would like to ask the VCs themselves. I think the problem is the founder IS Hampton Creek right now because it's so early stage and without him the company doesn't have as much to offer. If all of these allegations are true, then the company will have a hard time raising any more money and I can't imagine the current investors would continue to invest. That leaves the company with a pretty bleak outlook and leaves the investors out to dry. I'm actually more worried about what this would do for future startups in this space that have real potential. Investors are going to be less inclined to take risks on companies such as these. This whole vertical of plant based alternatives is really just taking off, so there aren't a whole lot of examples of great exits in this space yet....a home run for HC would have had a great trickle down, but instead it may hamper future startups' efforts to raise money in this space. The Glass Wall Syndicate, a group of funds, trusts, and angels investing in this space, will be doing early stage investing, but we still needs the Khosla Ventures of the world to do the larger follow-on funding that truly high growth companies will need to really scale. It worries me.
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