[dharmon]

Investors will look at financial statements (in whatever sad form they exist at most startups), but they don't look at itemized expenses. They also expect lots of money to be spent.

For example, let's say I wanted to take an expensive vacation. I would fly to Europe (1st class, of course), stay in nice hotels, and basically live it up. I would mark this down as a "recruiting expense", or "customer acquisition cost". If the investor cared to drill down to this level, all they would see is a $75,000 trip to Europe for recruiting. They wouldn't know how many people went, or how successful it was. $75k is nothing next to an engineer's salary, and a recruiter would take a fee on the same order of magnitude, so I doubt they would bat an eye, but a 20-something founder could take a pretty sweet vacay for $75k.

Want a new motorcycle? Its for product testing, of course. New $80k Tesla? We're exploring how our tech could be expanded to used in cars, not just with motorcycles. Hookers and blow? Team building.

[sanderjd]

I'm not sure if you're being tongue in cheek, but if not, honest question: aren't those examples of actual fraud rather than "just" frivolous spending?

[michaelbuckbee]

Like everything it's a spectrum. Those are incidents of outright fraud, but most of it is far more gray. It's the boyfriend/girlfriend hired onto staff as an assistant who only actually comes into the office 3 days a week. It's the trip that's an extra day for no good reason.

That being said, I think much of the grayness is for a reason. Brutal frugality will choke a business nearly as much as overspending.

[dharmon]

Exactly.

In my facetious examples, the European vacation actually would be for customer acquisition. There would be a meeting or two with potential customers, but they would still fly first class and stay in top hotels, plus have a few extra "fun" days.

The motorcycle really would be for testing, but they may think what's the harm in taking it home for personal use in between testing sessions?

[manarth]

Conspicuous consumption has a legit role in a company's marketing - whether it's a status-symbol impressive office building, helicopter transfers for execs, or luxury cars for senior staff, it's about sending the message "We're successful, and well-funded". Whether that's true or not, sometimes the appearance of success is enough to win the investment necessary to achieve success.

Kim Dotcom in 2000, posing with his model girlfriend in front of a superyacht…a year later he had multimillion euro investments from TÜV and BMP.

Want the company to buy a motorbike or car for "Product testing"? Totally legit - but it belongs to the company. Use it for personal use, and in most countries you'll be hit with a tax bill.

Mixed-purpose trips such as "Customer acquisition in Europe"? There are specific rules governing whether/how it's taxed: http://www.lewis-knopf.com/newsletters/financial-rx-article/...

Pesky taxmen. They thing of everything.

[dharmon]

Most definitely is fraud, and of course I wouldn't actually recommend doing it!!

But that's what parent was talking about, buying toys and parties and such and why investors don't notice. Cause they call it by a different name.

[vkou]

They are actually fraud, and nobody should do any of them.