> The fact that a young founder in an industry known for shaky metrics and a “fake it ’til you make it” ethos managed to dupe JPMorgan calls into question how stringent the bank’s due diligence process is.
This is actually a pretty rampant and under-discussed problem in SV. Exaggerated metrics in investor pitches are so commonplace that NOT exaggerating your metrics actually puts your company at a real disadvantage (because investors assume you're worse than you portray).
The first root cause is that a lot of this lying goes unpunished because investors are afraid to ruin their reputations (founders won't want to work with investors who sue the companies they invest in).
The second root cause is that investors on-average still make a lot of money, so they see this behavior as a cost of doing business.
I'm not sure what the solution is, but the fine line between positive framing and intentionally misleading investors is crossed way too much, and in the long run, it hurts both the founder and investor community.
> I'm not sure what the solution is, but the fine line between positive framing and intentionally misleading investors is crossed way too much, and in the long run, it hurts both the founder and investor community.
The solution for out-and-out fraud ought to be prison time. This does not sound like a case of "exaggerating metrics"; JPM alleges that the founder knowingly created false metrics and used them to misrepresent the company's value.
To be fair, SV is littered with stories of this tactic being successfully used, too. Two that come to mind immediately are Ashley Madison's lady bots and Reddit's use of fake users in its early days to make the community look larger than it was.
Agree that outright fraud should be punished. But, I think it's the more insidious forms of misrepresentation that cause most of the harm. Things like: exaggerating core KPI's by 1-20%, including organic traffic in the denominator of CPA, amortizing sales & marketing expenses, calculating retention based on self-selected cohorts, etc. As a case study, take a look at Talkspace's SPAC (https://finance.yahoo.com/quote/TALK/financials?p=TALK). There's no way this company got to public markets at a $1b valuation without serious misrepresentation of their marketing performance.
Early Reddit's comments were suspiciously too smart/clever. When telling people about Reddit early on, I'd warn them that I suspected Reddit was using professional writers as shills (but that that wasn't entirely a negative).
Gaming the karma and other facets of the system was pretty much always a sport.
Then it got popular, and by then it seemed third-party astroturfing/shilling and gaming owned the front page.
I mean they asked for a client list and she paid a data scientist $18k to fake one. I guess at some point the question is "do i believe this person is committing fraud on the due diligence requests we already made"
"Taking a provided list at face value" doesn't seem to be the same as "doing due diligence." You don't believe they're doing fraud in advance, you ask the questions that would let you find out if they are - because you know some people have committed fraud in the past.
4 million fake accounts created with a data scientist's help, then "JPMorgan said it learned the truth about Frank after sending out marketing emails to a batch of 400,000 customers. About 70% of the emails bounced back, the bank said in a lawsuit filed last month in federal court."
Nobody did any random sampling and verification earlier? 4 million out of 4.25/4.3M users were fake and you didn't spot it?
Due diligence means investigating the details, not presuming crime. If the founder murdered the staff of JPM in the office, you wouldn't say "guess they didn't do due diligence!" unless the founders had a record.
It's common practice at this transaction size to skip the level of due diligence that you're proposing. The reasons being:
1) It takes a lot of time to do this level of diligence
2) Companies aren't comfortable sending over their entire customer database to a purchaser before a deal is closed. And, if they send over a sampling, it doesn't solve for your use case.
2) There are indemnifications included in the final sale agreement that firmly protect the buyer from cases of fraud like this, so it's not actually necessary from the buyer's perspective.
That's very much incorrect. I do this for a living and I guarantee you that nothing gets skipped at a deal this size and it doesn't have to take all that long either, depending on how heavy the team is.
As for indemnifications: those are worth about as much as the paper they are written on when you're dealing with a fraudster, the money is probably long gone by the time you activate those clauses.
You're claiming that for deals in the $80-120m range, most of the time, the seller sends over their entire database of customer contact info before the deal is closed? I'm sure it happens in some fraction of deals, but to claim a majority seems absurd. That said, you probably know best - I speak from a sample size of 4.
What is her pedigree? It says she has known an early investor VP partner since 19 — yet she took out student loans herself so wasn’t from a wealthy family?
Oh she grew up in Westchester and her brother also went to UPenn.
“ When Charlie Javice, 19, and her brother Elie, 18, were growing up in the tony community of Westchester in upstate New York, their parents urged them to volunteer their time to help the town’s less fortunate.
Throughout their adolescence, they returned to the local soup kitchen, and each year, they saw the same faces.
That was their first lesson in the problem of poverty. “Obviously, there was a broken system if the same people
kept coming back,” said Charlie.
She and her brother are now a sophomore and freshman, respectively, at the Wharton School at the University of Pennsylvania, where they’re tackling poverty from a different direction. They’ve assembled a student-run microfinance platform called PoverUP that aims to break the cycle of poverty through capital, research and education, and social engagement.”
These folks were building up the right resumes for Ivy league admissions. Next time, you hear about "local soup kitchen", "helping build schools/hospitals in Tanzania", "some exotic sports". You can see the signals that an average tech worker (not $500K FAANG types) can't buy for their kids.
so how exactly did her selling her fraud company to JP Morgan help the "poor"? I swear these upper middle class liberal kids use the disadvantaged as an accessory to get ahead. SBF with his effective altruism.
uhhh, wtf is this characterization that she was "liberal" or "upper middle class".
She is an upperclass corporatist who grew up in one of the wealthiest towns in America, went to a center-right business college, was based out of Miami and trying to exploit public services (FAFSA student aid) for private corporate gain.
Perhaps more importantly, she managed to find a college professor willing to create the fake accounts, after a data scientist (who I imagine is junior in stature and public reputation) refused to do so.
This is actually a pretty rampant and under-discussed problem in SV. Exaggerated metrics in investor pitches are so commonplace that NOT exaggerating your metrics actually puts your company at a real disadvantage (because investors assume you're worse than you portray).
The first root cause is that a lot of this lying goes unpunished because investors are afraid to ruin their reputations (founders won't want to work with investors who sue the companies they invest in).
The second root cause is that investors on-average still make a lot of money, so they see this behavior as a cost of doing business.
I'm not sure what the solution is, but the fine line between positive framing and intentionally misleading investors is crossed way too much, and in the long run, it hurts both the founder and investor community.