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All Here founder's arrest shows it's easy for startups to scam investors (axios.com)
53 points by uladzislau 77 days ago | hide | past | favorite | 62 comments



The Forbes 30 under 30 to prison pipeline continues its excellent run.


Maybe it should be called the "Forbes 30 under 30 doing 30"?


Now that he's older and wiser, Jack Weinberg should revise his famous quote to:

"Don't trust anyone on 30 under 30."

https://en.wikipedia.org/wiki/Jack_Weinberg#%22Don't_trust_a...


Most solid firms, like my own, have strong financial controls, a CFO, and a board with strong oversight. Absolutely never had a problem.

If you are going to build a startup, build a board, get your finances in control and very transparent to investors.

Fraud will never be gone but you can ensure your firm will never be accused of it.


> Most solid firms, like my own, have strong financial controls, a CFO, and a board with strong oversight

One of my takeaways from the chaos surrounding SVB’s collapse is that Silicon Valley is starved of CFOs. Part of this is due to the anti-MBA high horse that was in vogue in tech post financial crisis. Part, frankly, is VCs wanting to be the only financial brains in the house. (Guess who loves promoting the MBA myths? Despite being staffed by MBAs?)


If you have the financial aptitude to become a CFO, would you rather eat ramen in a flophouse or make proper money in an investment bank?


> would you rather eat ramen in a flophouse or make proper money in an investment bank

Not a real choice. Ramen-stage start-ups don’t need CFOs. And investment banks don’t hire CFO types.

The real choice is between a growth-stage company and private-equity sponsored company. In summary, do you want to be compensated for your risk in cash or ownership?


The last CFO I dealt with had a weird balancing act: a conservative accountancy background but now involved in juggling risks and the job needed a fairly optimistic outlook.

CEOs seem to be expected to be optimistic and over-confident - and perhaps rewarded for that too.


I'd join successful startups planning to IPO within a few years and be the one to take them public. Look at the background of Stripe's current CFO for an example. He did Aruba Networks, Palo Alto Networks, Confluent, and soon Stripe.


As a CFO, VCs definitely don’t like other financial brains and they’re generally miserable to work with has been my experience

Their problem is they want the financials to track to their financial models despite their entire investment thesis being an opportunistic wonderland of assumptions. Otherwise, it wouldn’t have met someone’s imaginary return threshold.


It requires a great MBA to successfully perpetrate fraud! ;)


Right. This is the nonsense I’m referring to.

Silicon Valley VC convinced technical folk that we are better than those MBAs and don’t need no suits or whatever. That leads to stupid financial decision making on an operating level, e.g. companies keeping hundreds of millions in a checking account, which is great if that account is your liability. It also keeps the VCs the smartest financial minds in the room. (I don’t have an MBA.)


The startup I worked at whose CEO got arrested for fraud also happens to be a startup that didn't have a CFO. (Or, as he explained it at the time, whose CEO was also the CFO... but c'mon, lol.)


I still think most VCs will feel that super thorough verification isn't necessary, and in retrospect I agree:

1. Cases like the All Here example are kinda baffling to me. It's like the founder jumped out of a window without a parachute and was like "This is fine! I'll learn to fly before I hit the ground." I think in cases that are as egregious as this, the fraud is eventually discovered, if only because at some point it has to become blatantly obvious.

2. If by some miracle the fraudulent founder does manage to "make it" before their "fake it" is discovered, well then, honestly good for them I guess. VCs tend not to get too angry if you make them a ton of money.

Point being, in cases like this All Here one, the "Frank" company fraud by CEO Charlie Javice, Theranos, etc. were all examples that were pretty much guaranteed to be discovered at some point (and pretty soon at that), because none of their tech had any hope of working in the first place.

As an analogy, it's also pretty easy to write bad checks, but they're also likely to be discovered very quickly, with the check scammer going to jail, so banks just consider it the cost of doing business.


> 2. If by some miracle the fraudulent founder does manage to "make it" before their "fake it" is discovered, well then, honestly good for them I guess. VCs tend not to get too angry if you make them a ton of money.

For obvious reasons relating to perverse incentives "making it after faking it" doesn't get you out of legal jeopardy. None of Martin Shkreli's investors ultimately lost money but he still went to prison and had enormous fines imposed.


It's usually "This is fine! We'll use $BUZZWORD to fly before I hit the ground."

I still remember the countless startups where the business model was basically "You give us money by the boatload, and we promise to use the word blockchain in every presentation"


That makes sense, because they're just laundering the money, by definition.


> they're just laundering the money, by definition

By definition, no. You need "money obtained from illicit activities" [1].

[1] https://en.wikipedia.org/wiki/Money_laundering


> It's like the founder jumped out of a window without a parachute and was like "This is fine! I'll learn to fly before I hit the ground." I think in cases that are as egregious as this, the fraud is eventually discovered, if only because at some point it has to become blatantly obvious.

I think their goal was to use false figures to attract investment that would lead to real revenue that would eventually cover up the alleged fraud. If they managed to build a good product and find market fit and revenue with their Series A funds, maybe it would have worked. What’s weird though is that all these investors didn’t do basic diligence to confirm the money flows that were claimed. It’s a bit different from the Theranos fraud, where the fraud was around the effectiveness of a highly complicated and secretive product rather than revenues that are easy to confirm with bank statements.


> It’s a bit different from the Theranos fraud, where the fraud was around the effectiveness of a highly complicated and secretive product rather than revenues that are easy to confirm with bank statements.

Anyone who did the bare minimum of due diligence found out from experts that blood from finger pricks is not usable for the kind of diagnostics they were proposing, which is why no qualified biotech VC invested in them. It was all dumb money like Ruper Murdoch and tech investors Tim Draper/DFJ who have no idea what they're doing in biotech.

Investors didn't even need to look in the books or research, it prima facie was not going to work.


> Anyone who did the bare minimum of due diligence found out from experts that blood from finger pricks is not usable for the kind of diagnostics they were proposing

This is technical risk, however. I remember experts telling me in 2009 that SpaceX was fundamentally fucked.

Financial fraud is way more black and white because it’s backward looking.


Just because some tech investors got caught up in the hype doesn’t mean it was a real technical risk.

Finger capillary blood is fundamentally unrepresentative of blood samples taken from veins with few exceptions. Doctors and scientists have known this for a long time. Theranos’ technology was never going to work the way they sold it, and if they sold it as a faster on-site diagnostic device with standard blood draws they would have been just another in a sea of diagnostics startups that few care about.


> I remember experts telling me in 2009 that SpaceX was fundamentally fucked.

That is a very poor analogy to Theranos' situation. In SpaceX's case, there is obviously nothing fundamentally impossible about using rockets to get stuff into space - humans have obviously been doing that for quite some time now. I'm guessing the experts you talked to were more making economic arguments, or making arguments that the stuff SpaceX was proposing doing would be too phenomenally difficult before the money ran out.

That's very, very different from "physically impossible". Getting accurate quantitative tests from finger pricks is not "technical risk". It is physically impossible because capillary blood is simply not homogeneous enough at the proposed volumes. There was literally nothing of value that came out of any of Theranos' technology - it wasn't just a case of them not reaching sustainability before their runway ran out.


Ex post facto the arguments are obviously different. I have a background in aerospace engineering, and so was able to weigh and dismiss these experts’ conclusions. (They weren’t just economic. But they were biased.)

The point is consulting experts isn’t a fool-proof investing strategy. It will produce false negatives around paradigm-changing approaches while potentially bandwagonning on dead ends, e.g. amyloid plaques for Alzheimer’s.


> The point is consulting experts isn’t a fool-proof investing strategy. It will produce false negatives around paradigm-changing approaches while potentially bandwagonning on dead ends, e.g. amyloid plaques for Alzheimer’s.

The point is that Theranos' investors didn't consult experts at all. They really were tech investors bandwagonning on to an obvious dead end! The ones that did consult experts - like the biotech VCs - were smart enough to stay away.

Your experience with aerospace and some SpaceX critics is blinding you to the rather obvious Dunning-Kreuger effect going on here (FWLIW I worked on the MSL reentry shielding and Atlas payload fairing before transitioning to clinical trial design at Parexel).


> Theranos' investors didn't consult experts at all

What are you basing this on?

> Theranos' investors didn't consult experts at all

This isn't someone consulting experts. It's the experts themselves staying away.

My point is that VCs consulting tech experts isn't a great signal per se. I believe it should be done. But I don't have any evidence that it works, given that it's properly ignored almost as frequently as it's followed. (It's difficult from a distance to distinguish something that can't be done from something the person you're talking to can't do or believes they can't.)

Outside biotech, which has a parallel funding pipeline, the funds that obsessively consult experts don't do significantly better or worse from those who seem to YOLO it.


>> Theranos' investors didn't consult experts at all

> What are you basing this on?

The original quote may be a tad hyperbolic, but there was lots of reporting that all of the "smart money" in SV declined to invest. Here is a story about how Google Ventures did the most basic of due diligence and could tell early on it was handwavy bullshit: https://www.businessinsider.com/bill-maris-explains-why-gv-d...


We all make stupid mistakes. Some of these mistakes included being scammed. We all heard of people who got fooled by the classic Nigerian prince scam and think "it can't possibly be me". It may indeed not be you but you might be more vulnerable to a different kind of scam.

I am more interested in developing the mechanism and knowledge it would take to avoid making those kind of mistakes.


> I am more interested in developing the mechanism and knowledge it would take to avoid making those kind of mistakes.

Step #1: do your due diligence. Usually that means hiring experts to do it for you if it’s outside your field of expertise. Biotech VCs have a stable of expert consultants in many subfields of science and medicine to do the reviews for them, as well as accountants to go to for financials.

That’s it. There are no more steps. Doesn’t matter whether its a founder asking for capital or a nigerian prince asking for a wire transfer.

Theranos’ investors did not do their due diligence and paid the price.


I am not vulnerable to any kind of scam.


That's the kind of unjustified fake confidence you can only learn at an expensive motivational seminar.


Really? I've never been to a motivational seminar. I heard that they're scams.

Sometimes confidence is justified.


I've successfully taken a variety of calculated risks over several decades which have all worked out as expected. That's not to say all were successful but none turned out to be scams or materially different than I thought. The ones that failed did so for reasons I was aware of and estimated risks of before hand. I had a set of rules which I wouldn't break

Risk Rules:

1. Only take significant risks in domains in which you have substantial first-hand experience, expertise and which you understand deeply.

2. Spend significant time deep diving on the specific opportunity (due diligence).

3. Write out your investment thesis in detail including calculating the risk and return. Include a bullet point list titled "Everything that has to be true for this to work." Put percentage odds next to each bullet.

4. Before leaping always ask yourself "If this goes completely bust, will I not regret it because it was for reasons I knew about and I can honestly say 'given the same opportunity, I'd make the same bet again'?" This is important because the nature of risk is that sometimes it doesn't pay out but the potential reward is worth the potential loss when averaged over multiple bets.

The people I know who tend to have 'regrettable losses' also tend not to have a well-grounded understanding of how economic value works in principle. They're the kind of people who assume others get rich by "getting in on the new thing before everyone else does." While it's true this can happen, it's not what I'd consider a workable long-term plan.

It's true that these rules have resulted in "missing out" on some opportunities which turned out very well for others. For example, I had some friends who were fairly early into bitcoin and did quite well. I looked into it at the time and I understood the principle while also liking the idea of decentralized currency in concept. But I ultimately passed because I just didn't feel I had enough background knowledge of the cryptocurrency domain and, because I'd recently launched a startup, I wasn't at a place where I had the time/mental energy to devote to learning and tracking the evolution of the crypto marketplace to know when to sell. Essentially, my "risk bandwidth" was already committed to a high-risk, high-return bet (and the startup bet worked out very well - in part because I was 100% focused on it). I have zero regrets about "missing out" on early bitcoin because I'm confident that pursuing bitcoin would have put my startup at (greater) risk. Also, when I made the choice to pass on bitcoin, I acknowledged that it very well might "go to the moon" and I'd be missing out, but I was confident both then and now that I was making a difficult but well-informed choice. I think that's why, when I reflect on that choice, it's never evoked a feeling of regret. The same principles and strategy that minimizes regret on losing bets that were properly taken, should also minimize regret on winning bets that were properly not taken.

Another example is that during my multi-decade career as a serial tech startup entrepreneur I had most of my net worth tied up in my startups but as I made enough to set aside some into investments, those investments were entirely in a relatively conservative, long-term diversified portfolio (eg standard 'bogglehead' investing strategy). And I only looked at the portfolio once a year. My reasoning was simply that I was already exposed to more than enough financial risk (and potential reward) in my startups to take on any more volatility. Another way to put it is to evaluate, revise and optimize your risk strategy, not individual bets. As long as each bet is properly executed under the strategy, you don't regret individual bets, only the execution or strategy - which can be changed or improved going forward.


This is pretty much a guarantee when VC funding is driven by FOMO rather than fundamentals. If anything I'm surprised by how such few founders end up in handcuffs.


The truth about raising VC money is that it's mostly about deception.

If you don't deceive, other people who engage in deception will be funded instead of you.

Alot of VCs actually admit to this indirectly.

They say for example the role of a pitch deck is to "Get the VC excited".

If you talk about real, boring numbers? (early stage businesses must have boring numbers or they are actually not "early stage". How can you make millions of dollars and continue to call yourself "early stage") you will be ignored.

It's about like dating. If a woman wants to get attention from men.

A rational man would look for features like trust worthiness, commitment, love, he cooking skills etc.

But women know that to get most men's attention it's usually about having a fake silicone butt, fake exposed cleavages, fake pouty lips, fake hair and make up.

Deceptive women definitely get more attention from men than natural undeceptive women.

We shouldn't be surprised that in VC investors are biased to fall for deception from fraudulent start-up founders.

Instead of real founders that don't have Juicy metrics.


> Alot of VCs actually admit to this indirectly

Did they say this at a secret VC party? Or did you hear someone praising chutzpah and hear that as fraud?


They said it on a podcast.

I have even read documents on blogs by law firms close to VCs & tech firms that describe pitch decks as a "hook" — as in like the bait used to catch a fish.


> They said it on a podcast

Let me guess, All In? They make money on eyeballs. Their job is to be provocative, irrespective of the truth (or their track records in VC).

> describe pitch decks as a "hook" — as in like the bait used to catch a fish

“Hooking” customers is a common sales analogy. Particular when you’re playing a numbers game, where the individual characteristics matter less than the yield. Like in fishing.


The blog posts was not about customers.

It was about how to bait VCs using a pitch deck.


> It was about how to bait VCs using a pitch deck

Yes. It's still a sale. There are seminars on how to 'hook' donors as a non-profit. This is common language easily surfaceable with some light searching.



Somewhat related: I find the concept of "pivoting" pretty ridiculous: "Here's our start-up, our idea doesn't work. Let's do something completely different before our funding runs out!"


Early stage investors are funding founders, not products. It's very rare for an idea to work out exactly how it was intended from the get go. I'd wager most/all successful companies are a product of multiple pivots in their early years.


Which is complete bullshit considering it's impossible to get funding unless you have a team, a product and already traction/customers/sales nowadays. But sure. If you're super well connected and your buddies fund you...


PayPal famously raised money then immediately pivoted. It sometimes works out.


I mean, would you rather continue doing what isn't working?

Most pivots are to a related idea though.


> I find the concept of "pivoting" pretty ridiculous

I find special relativity ridiculous, that doesn’t mean it doesn’t work.




It’s a regular Tuesday. Just look at how “Spac King” Chamath Palihapitiya scammed millions out of investors.


All Here founder getting away with it would more convincingly show that it's easy.


At what level of $$ investment do angel investors, Silicon Valley VCs and/or boards expect professional, periodic audits?

This is what I personally want to see in non profit board meetings: cash flow, headcount, categorized expenses and a balance sheet. I also want to see a copy of a bank account statement attached to the board docs validating the cash flow numbers. This is not a proper audit - but this builds a paper trail where the CEO is snap shotting an org's financial health in writing at a period in time.

What does a VC who has invested $8M expect in terms of audit?


Ostensibly this roostful homecoming is a result of increasing capital costs.


“usually via small wire transfers via PayPal or Zelle”

Come on Axios…


What's? What's wrong with it?


> What's? What's wrong with it?

While you technically can send and receive wires from your PayPal account, most transfers on PayPal are done via PayPal. Zelle, meanwhile, doesn't support wires--it's a totally separate payment rail. "Wires" in America means Fedwire, a specific rail. (Globally, it means a widely-used real-time gross-settlement funds-transfer rail.)

"Wire transfer via...Zelle" is nonsense.


[flagged]


You stated that "It looks like a lot of absolutely basic due diligence from investors was skipped, probably due to the prioritization of DEI initiatives and willingness to support them blindly." Do you have any proof that due diligence was skipped? Also, due diligence will not catch every fraud.


I don't think venture capital are known to be discerning about what they invested in. They will dump money and follow industry trends just like everyone else.

DEI initiatives are just excuses for doing a bad job. They would have done a bad job anyway.


I don’t have proof, since I don’t have visibility into the company or their investors. I’m speculating based on the kind of things that are typically done to verify things before finalizing an investment. For example from the DOJ release we know millions in revenue were claimed but the actual revenue was only $11000. They also lied about the cash on hand, which is easy to confirm, and the customers they had. None of the investors checked to confirm the contracts with the biggest school district partnerships they claimed either, it would appear. These are typical things to explicitly confirm in due diligence.


No, but the great thing about a company collapsing into fraud is that anyone can bring out their favorite whipping horse for the reasons why.


> I’m still not sure how that sort of discrimination is legal, but here we are.

It's still an open question whether or not the civil rights act protects whites or not (that is, are they a protected class). That's not flamebait, although I realize it's a spicy observation. Regardless, there is a real question around the legislative intent when the law was passed and in ordinary jurisprudence laws are interpreted through that lens, among other factors.


Open question?

I kinda doubt it.

The CRA doesn't mention, afaik, any particular ethnic group.

E.g., It shall be an unlawful employment practice for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin;...




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