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Star of “Startup.com” Charged with Accounting Fraud (wsj.com)
87 points by harold on Nov 11, 2015 | hide | past | web | favorite | 49 comments



I worked at ROO Media (which KIT Digital acquired) and met with Kaleil a number of times. None of us who worked there are even remotely surprised. No signs of revenue, yet we would spend like crazy and even acquire companies with magical "stock money".

It was the most corrupt place I have ever worked in my life. The COO was a ghost who just spent money (like staying at hotels all the time, even though he lived an hour away by train) making 400K+ at a startup with no revenue, the CEO (who Kaleil replaced) drove the company into the ground and subsequently started another startup that is now under lawsuit as well after lying to his employees and not paying them for months. Absolutely crazy stories.

Happy to answer any questions :)


"like staying at hotels all the time, even though he lived an hour away by train"

Who invests in these things? Even more puzzling: how is it that these hucksters keep raising money to found another startup? I've seen this phenomenon before. I called them "financial serial killers" -- hustlers who raise money, vaporize it all, then raise again. They're "serial failed entrepreneurs," and we're not talking failures where they legitimately tried. We're talking failures that involve lots of stupid asshat money-burning and nothing much of substance at all.

My mind boggles. It's like there's some clique of investors out there who believe in supporting sociopaths as some twisted form of philanthropy. Either that or they're making money too through some as-yet-mysterious means.

I do have one total speculation:

Is it possible that there could be some kind of money laundering going on here? Are these money-burning "investments" actually something else? Sometimes stupid things actually aren't stupid if they're viewed from the right perspective, and things that make no business sense might actually make a lot of sense in some other way.


There was no doubt money laundering happening. We also had a consulting company we hired, that we "had" to use and we paid absurd rates to. I am sure there was money flowing under the table or to fund other shenanigans.

I have no idea how they kept raising money, outside to say, Video was hot at the time, and the corruption was buried in complicated accounting fraud so it wasnt front and center.

If you want the details check here - https://m.fbi.gov/#https://www.fbi.gov/newyork/press-release...


The thing I try to keep in mind is that nobody can make perfect decisions. We all have heuristics that work pretty well for us generally, and sufficiently clever/prepared people can abuse that.

For example, think back to Google Glass. There was a time when it was an amazing revolution about to happen. There are pictures of generally smart, experienced people wearing Google Glass and trying hard to look like the future. [1] How much got spent there? On the glasses alone, figure it was something like 100,000 units at $1500 each for a total of $150m. Google presumably spent a fair bit more on R&D and marketing, and plenty of other companies spent time and money on the platform.

Were all those people dumb? I never understood the appeal of Google Glass, so you'd think I'd be inclined to say so. But my take is that the people who gave that a go were just working with different heuristics than I am. Lord knows I've bought plenty of disappointing gadgets over the years. As long as we're write more often than we're wrong, the heuristics aren't bad, just not perfect.

So here I figure that most of the people who put in money weren't idiots; they just had different ways of judging. E.g., a lot of deals happen partly because of trust. But we all know that con men are people who are extremely good at manipulating trust-related heuristics.

[1] http://www.forbes.com/sites/tomiogeron/2013/04/10/google-lau...


You're right that there is no perfect heuristic, but Google Glass wad real and real stuff was done.

If you've ever been near or caught up in the whirlwind of one of these hustle jobs, it's obvious and unmistakable that nothing is "actually happening." They're not failed attempts to do something, but successful attempts to appear to be doing something. They're cons.


Well, from my perspective, Google Glass was an immense failure. Yes, they made a product, but not one that was actually useful for anything. (Really, I asked every Glass owner I could find what they were using it for.) At the time I thought it obvious and unmistakable that nothing would actually come of it. Was Glass better because people fooled themselves into putting forth even more unnecessary effort? Or was it worse?

That's not my point, though. My point is that from the perspective of the investors these things look great because they are optimized to appear that way. They may look dumb or pointless to people from other perspectives, of course. But it's like one of those optical illusions that only works when you stand in a particular spot. Every company does this with their investors. Every company does it with their customers.

I also think the dividing line between con and regular company is not as clear as you make it to be. How many people do you know that have stories of working at companies where the executives have no clue? E.g., the charismatic but coked-up executive, or the VP Sales who promises entirely impossible things on a regular basis. Stories where things only worked out because actually clueful people worked hard and made it happen. Or at least made enough happen that checks got cashed and customers didn't actually sue. I know a bunch of those stories, and I'd bet you do too.

I could easily imagine that this was not an out-and-out scam, but just something moderately more fucked up than places I've seen end up doing quite well.


"Hustlers", I loathe that word, but it's pervasive in the tech industry. I knew hustlers growing up, they sold cocaine cut with baking soda and screwed people over when they could. I don't understand how so many entrepreneurs use that word proudly.


> "Hustlers", I loathe that word,

I understand where that sentiment is coming from, but to be fair, I also heard the word growing up, but used to describe a certain kind of athlete - the kind who would dive into the bleachers to save a ball.

In that sense, it's like the word "hacker". A word with two diametrically opposed connotations. And it is interesting how two such potentially ambiguous words have assumed such a prominent place in SV culture.


That's what most San Francisco entrepreneurs are, though. It's just the white upperclass version of it—and instead of going to jail, you get to start as many fake companies as you like and rake in the cash.


It was a publicly traded company.


I thought you had to meet certain criteria to become public, like showing X quarters of consecutive growth and bend-over-and-grab-your-ankles audits and such? Or is there some wild west of penny stocks and cocaine that I don't know about?


If memory serves me right, they bought a public company for not very much (I think a carpeting company) that was failing, and folded ROO into it.


They were a pink sheet stock (Penny Stock), not sure if that made things different or not.


Maybe those regulations only apply to the exchanges.

Tangentially I read about an interesting money laundering technique once. Apparently you can take two low-volume stocks and use them to launder money by effectively committing financial fraud against yourself. It works like this:

1) Take a small amount of clean money and average into a position on a cheap low-volume stock.

2) Take the dirty money and use it to pump the stock by buying in and driving it up.

3) Sell your position on the clean side. Then pick another low-volume stock and do the same again.

Apparently variations of this technique can be used to smurf money across the market. You'll lose some in the transfer but that's cost. The dirty money appears to be "lost" in the market, while the clean side books short-term capital gains. I'm sure experts would know how to calibrate their smurfing rate to avoid SEC scrutiny and minimize side-channel losses. Seems like something that could be automated with an algorithm.

The illegal drugs industry kicks off such obscene profits that there's probably an enormous market out there for creative ways to launder it all.


I Think this is close to what he was doing. He had an investment bank friend that would just constantly sell and buy on the stock to look like there was "activity". In the end it was the same person selling and buying massive amounts of stock.


Hey Alan! - Tristan here... I remember those times.


Why did you keep working there?


I worked with some great people, and we all had hope we can jointly help turn things around. Obviously , we were wrong.

In retrospect, we should have went to the board like we discussed and tried to salvage the company which could have had a decent product, were it not for the constant corruption and idiotic decision making.


Oh man KIT Digital was one of the stranger companies I've run into over the years. They were in the process of buying everything they could get their hands on from Broadcast streaming to social games. Had some initial conversations about them acquiring my small dev shop at the time (we were too small for it to make sense), then they became a client. Even at that point as an outsider the whole thing seemed a little off.

At one point I was supposed to meet Kaleil at CES and our plans kept falling through. Finally as I was waiting for my plane back to SF I got a call from his admin asking if I wanted to join him at his table for the AVN awards that night (the CES dates always butt up against the AVN (porn) awards). I ended up passing....


Have you seen the movie? There is ZERO evidence in the movie that either Kaleil or his co-founder Tom are talented or successful. They're certainly, as mikek says in his comment at https://news.ycombinator.com/item?id=10547832, "driven"! But that's why they were seeking success by dishonest means in the first place. As IMDB says:

> The process of building the business focuses on obtaining venture capital based solely on the idea, with the actual mechanics of the website seemingly almost an afterthought, or at least one left primarily to the hired help.

Basically they were two guys who tried to capture a lot of value without creating any, basically by world-beating levels of hustle. That describes the story of KIT Digital, too.

(Don't forget that Kaleil stabs his cofounder in the back in the middle of the film, too — metaphorically, fortunately.)

I think this is a big problem with the current "entrepreneurial" ethos: you have people out there who are really honestly creating a lot of value, and then you have people like those guys who see a big pile of money and try to scheme up a way to skim a bunch off the top, making life harder for everyone who's actually contributing.


The problem is that some of the stories of great success are actually quite close to the ones that are outright scams.

It's harder to tell the difference than it probably should be. Around the 2000's there were a number of acquisitions of companies that were mostly hot air. It's a game of hot potato (don't pick it up!), if the investors make bank on your BS company then nobody will complain (except for the acquiring party, but hey, that's their problem...).

It is also hard to tell which companies are actually contributing and creating value and which companies are simply pumping money around. See: groupon for instance.


Oh, yeah, I worked at a startup at the same time whose founders were super brilliant technical people. We went to go see the movie when it came out (we'd all left the company by that point IIRC), and we recognized a lot of common experiences with what we saw on the screen.

I don't know about Groupon. Group buys have been very successful in China but I have the sense that Groupon has institutionally evaded the accountability to its product buyers that is required to make a group buy into a net-positive interaction, let alone a win-win.

(Amusing sidenote: in Groupon's heyday I met a US spy (who of course didn't admit she was a spy) here in Argentina whose cover story was that she was coming here to open up a local presence for a more exclusive Groupon-like company called Theliste, which turned out not to exist. We had a good time at dinner talking about Arabic grammar and morphology, which she had been studying at a language school in Monterey, California; her boyfriend and my wife were unfortunately a bit left behind by the conversation.)

Pumping money around can contribute and create value — consider Bitcoin, where the question is not whether Bitcoin creates value, which it clearly does, but rather whether its potential to destroy civilization (through prediction markets and tax evasion) is more or less significant than the value that it creates.

Also, there are plenty of great successes that are outright scams. The British East India Company, for example, or the Congo Free State, or the police department of Ferguson, MO, or Bernard L. Madoff Investment Securities LLC, or the Treaty of Guadalupe Hidalgo, or the divine right of kings, or the sale of indulgences. Heck, we could even include those guys who robbed me on the train a couple years back.


Why did a spy tell you she was a spy?


The fact she went to a language school in Monterey is a good hint as to her background at least.

https://en.wikipedia.org/wiki/Defense_Language_Institute


I think there was some editing between comments - the whole Monterey thing is new to me.

Now of course the question is, who's side was she a spy for ;-)


kragen said she never said she was; he's inferring.


You think the only possible reason for a woman to lie to you is because she is a spy?


I've been around for a while (since the late 90s) and see some promising signs that investors are getting more savvy about these things. The number of companies with real "meat" that get funded seems to be increasing relative to the number of vapid hustle-and-flip stunts. But I don't have scientific statistics for this (how would you even do that?) so it's just my impression.

On the other hand there's the unicorn phenomenon which I still do not fully understand. It's obviously some kind of game to artificially pump valuation, but I'm not sure why yet... especially since over-inflated valuations seem to almost guarantee a down round. Who benefits there?


> you have people out there who are really honestly creating a lot of value, and then you have people like those guys who see a big pile of money and try to scheme up a way to skim a bunch off the top, making life harder for everyone who's actually contributing.

You just described every VC and LP in Silicon Valley. They're not working and creating value, they see a big pile of money and try to scheme up a way to skim a bunch off the top, making life harder for everyone who's actually contributing. It's no surprise that "entrepreneurs" get swept up in this thinking as well.


I can't say I'm surprised. If you haven't seen it, Startup.com was great. Tuzman came across as about as likeable as Billy Mitchell.


It's sad when people who are talented and driven and successful decide that their success isn't good enough and they have to take it to the next level by dishonest means.


I wonder if Tom Herman (Kaleil's partner at GovWorks and partner at KIT) is going to get wrapped up in this too. I hope not since Tom came across as a nice enough guy in the film. https://www.linkedin.com/in/tomherman


Watched the film in 2001, still waiting for USPS to start scanning my PO Box mail and email it to me.

Actually, they don't have to go that far. I'd take a simple email notifying me that I HAVE mail in my PO Box, and maybe who it's from. Would save me a trip a week probably.


I think you're thinking of the wrong thing. govWorks was more of a digitization of traffic ticket payment/appeal, property registration, and other minor government admin processes. You must be thinking of Startup Junkies, which was a series on MoJo - a former/original HD channel.


http://thewhineseller.com/2012/03/usps-adds-needed-features-...

I remember seeing this on the USPS website a while back, but I haven't tried it myself yet.


I haven't been able to find a way to try this. I'm not sure that it exists yet, at least not everywhere. Seems like each year someone posts something saying that it may be coming, but I personally haven't seen it yet.


Have you considered using a registered agent service, e.g., Virtual Post Mail and Earth Class Mail? They do this, along with other services like check deposit, and it's only marginally more expensive than a PO box.


Earth Class Mail filed for bankruptcy recently

http://www.geekwire.com/2015/heavily-funded-earth-class-mail...

Edit: They're also who I thought this was about. I get Startup.com and Start-up Junkies mixed up. Start-up Junkies followed Earth Class Mail, and was also pretty interesting.


ECM is still very much functional, fortunately, this seemed like some kind of a restructuring move.

Disclaimer: customer for many years


Yes and no. I really want the service as part of my local post office.

I wish I could keep my current PO Box that I've had for years but still have some of these features.

It would be awesome if the Post Office could:

A) Let me know mail has arrived, and from whom.

B) Mail be a box full of my mail once a month to my physical address. That way I can either drive in and get it, if it's urgent, or just wait for the box.


The USPS can alert you when you have new mail in your PO Box. You just have to go to your post office to get it set up.


I too can add another testimony to just how mad KIT Digital and ROO both were. But goodness me it gave me some stories for the diary. The C level was nuts, but everyone else, goodness they were good, hardworking people.


One of my favorite all-time movies, even though their plan ultimately failed Kaleil and Tom were my heroes as a teenager. Really sad to see this.


Wasn't that the movie with the scene where the founders are presented with deal terms and given X hours to decide and they think they can't consult with any outside people (attorneys, etc) during that time?

Does that ever really happen? My instant answer would be "No" if I was seriously given that restriction.


Next they'll be investigating Tup.


Looks like Preet Bharara has found tech headlines even juicier to chase than hedge funds. Unicorns beware.


[deleted]


oh wait... googling shows it as a real documentary. Could have sworn when I saw it so many years ago that it was not a real company


it's real, I just watched this again a few days ago.


When I watch it back then I wasn't sure and it just felt a bit staged but I guess not.




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