In the drive to back the next transformative business, the race for growth and scale can sometimes outpace careful oversight. Valuations rise, promises inspire, and opportunities seem too good to miss. But as the collapse of Builder.ai illustrates, and echoing lessons from the Theranos saga, when ethics, compliance, and sound governance are overlooked, the consequences can be severe. It is no longer credible for boards and investors to claim, “we didn’t know.” The real challenge lies in doing enough to truly understand.
Builder.ai rose on the promise of AI-powered app development, earning the backing of major players like Microsoft and Insight Partners. The company projected a future of faster, cheaper software development, fuelled by artificial intelligence. But beneath the story lay uncomfortable truths: the work was driven largely by 700 human engineers, not AI as customers were led to believe.
Allegations soon followed of inflated revenues of hundreds of millions of dollars, including misleading projections that distorted investor and lender perceptions. Former executive, Robert Holdheim, reportedly filed a $5 million lawsuit, claiming he was fired for raising concerns about these very misrepresentations. Despite these clear red flags, boards and investors hesitated, placing blind faith in the founder’s vision rather than confronting inconvenient facts. And I’m sure there will follow the redundant excuse “we didn’t know.”
Yet this case highlights deeper structural failures. Builder.ai’s board, like those of many high-growth tech start-ups, appeared to lack independent directors with deep expertise in compliance, ethics, or emerging technologies, individuals who might have been positioned to ask tougher questions and push for independent validation of key claims. The company’s governance structures and oversight processes, as reported, failed to identify or act on serious red flags until external pressure from lenders and investigators forced greater scrutiny. Any real and meaningful due diligence that might have uncovered these issues early on was either superficial or side-lined in the race for scale. And when credible concerns were raised internally, the response was not robust inquiry or recalibration, it was, allegedly, retaliation.
This failure wasn’t just about a charismatic founder overselling a vision. It was more likely investors and board members neglecting their duty to do enough to find out. Ethics and compliance were treated as afterthoughts rather than as anchors of sustainable growth. The Builder.ai collapse serves as a reminder that effective oversight means more than occupying a board seat or rubber-stamping projections. It demands courage to challenge, curiosity to probe, and the humility to admit that speed and scale are no substitutes for substance.Builder.ai is far from an isolated case. As I argued in Corporate Compliance Insights article, The VC Ethical Dilemma, there's often too much focus on rapid scaling at the expense of building ethical DNA. Start-ups are pushed to grow fast and break things, including sometimes the very trust and integrity on which long-term success depends.
When failure comes, boards and investors retreat to this now familiar refrain, “we didn’t know”. But as Tyler Shultz shared during our LRN conversation on The Human Cost of Compliance Failures, what boards too often mean is “we didn’t want to know”. On his very first day at Theranos, Tyler heard whispers of internal chaos, a senior scientist fired after warning the product wasn’t ready, and a culture so secretive that even employees in the lab had never seen the technology they were building. It wasn’t long before he realized the truth that the product didn’t work, the data didn’t add up, and the public claims were dangerously misleading.
Still, no one spoke up. Why? Because fear ruled the halls of Theranos. Employees were isolated by locked doors and silos, muzzled by aggressive NDAs, and threatened, sometimes sued, if they raised concerns. The message was clear: silence wasn’t just expected, it was enforced. This kind of toxic culture doesn’t happen overnight, it starts with small compromises, choosing short-term wins over long-term integrity. Over time, those shortcuts become the norm. Ethics aren’t broken with a crash; they’re eroded with a whisper.
Even at the top, boards often hesitate to probe too deeply for fear of rocking the boat, challenging charismatic founders, or slowing momentum. They place greater faith in visionary narratives than in uncomfortable truths, but in doing so they often allow compliance failures to fester until the damage is done.
To break this cycle, boards and investors must stop repeating past mistakes and start reshaping governance for the realities of today’s start-ups. That means adding directors with AI, compliance, and legal expertise, not just industry credentials or commercial acumen. As start-ups increasingly rely on advanced technologies and operate in complex regulatory environments, boards need members who can challenge, question, and see through hype.
Making robust ethics and compliance programs a condition of funding, not just a post-IPO box to tick should be mandated and as I wrote in “The VC Ethical Dilemma”, venture firms shape the ethical foundations of what they fund. Requiring these frameworks at the outset is not an obstacle to innovation, it’s protection for value, reputation, and trust.
Conducting real due diligence, on founders, governance structures, and ethical risks, should be table stakes, rather than relying on glossy narratives and growth potential. But still, blind faith still seems to win. New board members should be asking what controls are in place, how is data handled, where could risk emerge?
Having a dozen board appointments may seem like a badge of honor, but sitting on too many boards could lead to a lack of bandwidth for real oversight. In today’s environment, with so many innovative ways to conduct due diligence, directors can no longer claim ignorance. If they didn’t see the problem, it’s often because they didn’t look hard enough.
The lessons of Builder.ai, Theranos, and other failures point to a shared truth that ethics and compliance are not barriers to success, they are enablers of it. They protect not only against legal and reputational harm, but also against strategic blind spots that can destroy value overnight.
The question is no longer whether to integrate ethics and compliance into governance. The question is whether investors and potential board members have the courage to demand it now, before the next crisis unfolds. Because in the end, the issue isn’t whether they knew. It’s whether they did enough to find out, and act.
