“Our theoretical framework captures how entrepreneurs facing minor, wide, and extreme expectation-reality gaps engage in evermore sophisticated efforts to detach the venture’s externally projected appearance from its actual operational reality.”
Look, I’m not promoting fraud at all, but having been doing seed raising for the last eight months, there have been many times where I thought the only way to compete was by fudging the numbers (because everyone else is, basically). It’s one of several reasons I left this game and am pursuing non-traditional means of funding now.
IME, it's about pushing you to overextend on the forecast, so that when you don't meet it, they get more control or claw back funds promised or given.
Fudging actual numbers is a dangerous and illegal game to play and never pays off, except in the edge cases (e.g., Enron... but usually you have to pay the Piper).
Interesting, this presents an meta for an early stage investor. Fund a company with a BS forecast based on your ability to make money on the claw back provisions.
From my experience they wanted you to demonstrate enough metrics that would have justified NOT ever getting VC funding. It feels like they are just becoming lazy.
I spent a few years hanging around the VC-adjacent scene in a major city, met quite a few of them (because I'm that way. elevator docent during events... priceless).
There is publicly performed theater around VCs which is pretty consistent, taught in incubators, etc., etc. So that's how they manage set and setting (grooming) for the marks. Internally there are certain tells, that they must act a certain way. There are arbitrary character tests and whatnot which provoke a "culture" if you will, similarly to how computer languages and tech stacks form distinctive cultures if left unchecked; there could be self-selecting pressures (for these behaviors) as well. This is unsurprising to me as someone who analyzed voting patterns, and was asked numerous times variations on the question "is it something in the water or 'new car smell'?" (I don't have an answer for that question.)
However VCs are much more stovepiped and cliquish concerning their actual selection process than people realize, I've heard it publicly described as "mafia like" by someone who I worked for and whose name many would recognize. I don't understand why this person, like so many others, invested so much effort... enough to get some serious butthurt IMO.
It's a distraction, it effectively destroyed a different company I was working for.
My understanding so far is that as humans we get bounded by our emotions, morals, incentives and fears. On the other hand you are competing against capitalism that tries to use any possible means to make profits. It treads along every possible path of whats not completely illegal. What benefits it is that either the laws are not yet defined to cover those situations or they are hazy enough that there is an escape hatch. You name any big company and they have gone through the path of doing something that was illegal or questioned. Just like critical mass or escape velocity, if you are big enough you get through the hurdles or otherwise you get stuck and make a good topic in some ones paper like this.
Probably a bad qualifier. Maybe non-VC would have been better. Myself and my co-founder are trying to raise via a syndicate of like-minded investors/angels in lieue of the "traditional" VC dance.
How is that going? I ask because just recently I read a post from someone I know who is getting out of the angel investing game. Her primary complaint is that in a couple early stage investments she made that then were successful enough to go on to a VC series round that early angel investors got shafted. That is, there was a strong desire from VCs to "clean up the cap table" and buy out early stage angels just as the business was starting to accelerate. There was some definite bitterness in her tone, feeling like she went out on a limb for some founders before the business was proven out, and then got dumped once the deeper pockets came along.
I don't know the details of her situation, what else she could have done to protect her investments, or how common an experience that was, but there were many comments in agreement under her post, so I'm just curious if it's widespread.
This is where PE came from originally, but then scaled to commercial bank / pension fund levels of investment. At least VC and Founders are aligned and honest about their goals (to the moon!); I've seen PE destroy more solid / non-rocketship businesses than VC
You highlighted the basis for widespread corruption. At some point you no longer do it to get an unfair advantage, you do it because without it you get an unfair disadvantage. Widespread fraud is no different.
I’m really not trying to virtue signal. There’s a lot more nuance to my reasoning to leave the traditional VC game. All of them led me to declaring it fundamentally incompatible with my world view. Which then led me to my current path of attempting to form a syndicate of like-minded individuals.
But this study validates a lot of feelings I’ve had over the last several months. There’s a ton of people that never get caught, of course.
Oh, I did not take it as virtue signaling at all! I do actually admire you for looking at a dirty game and saying "I will not play this, I will find a better way."
If I ever win the lottery, I'm going to create the Joseph Welch Foundation. The foundation will give monetary awards to people who have demonstrably pushed back against corruption, lies, and bullshit.
For those who don't recognize the name, Joseph Welch is who said "Have you no sense of decency, sir, at long last, have you left no sense of decency?" to Joseph McCarthy.
Too few people remember Welch. McCarthy was the asshole but his name is remembered more. I see this as an error we have made with our societal memory. It would be better to remember Welch, and only remember McCarthy as "that red scare guy".
What we should be doing, as a civilized society with rules and a regulatory apparatus that's woefully underused, is looking at the dirty game and saying "The game is over. The people/government is going to finally crack down on fraud and people who play the game are going to prison."
well i've got some bad news, that era has now entered its maximum power phase. Our government has literally been systematically deconstructed to become unable to govern.
> If I ever win the lottery, I'm going to create the Joseph Welch Foundation. The foundation will give monetary awards to people who have demonstrably pushed back against corruption, lies, and bullshit.
If you do that, given enough time, you will be awarding people that learnt how to game the award. Back to corruption, lies and bullshit.
A lot of 'numbers' startups cite are basically fake I think. Like if someone says we have this many users as a statement to TechCrunch you have no idea what they are actually calculating
But there is a clear line that gets crossed if you start actually making a database of millions of synthetic users and that's what happened with 'Frank' that sold to JP Morgan and eventually the founder was prosecuted
Not just users, but number of companies. So many startups list out all the companies using their products, who also happen to be an army of startups. I doubt they're all using each others products, just doing what they can to juice each companies perceived metrics.
Supposedly B2B SaaS companies in YC have been known to enter into agreements to “buy” each others’ products so they can all book more users and revenue despite a single dollar not changing hands.
In the current environment I doubt Elizabeth Holmes would go to prison. She would be saying the machine would work by early next year. After all a drop of blood is just a smaller quantity. Making the machine work is just an engineering problem.
If she were really clever she would recruit a social media army of all the weird conspiracy theorists who think "medbeds" are real.
Of course now we know that a drop of capillary blood containing interstitial fluid and a random mix of venous and arterial blood is unsuitable for most blood tests. At least you will have googled that if you're an Elon stan preparing to tell me how they're not comparable.
Cool thought process, but the real reason Elizabeth Holmes would not go to prison if she pulled that shit today is much, much simpler: She would know to make a nice sized donation to the current administration (or a sweet business deal for one of his family members), and the justice system would simply be completely hands-off her. She'd give 5% equity to Jared Kushner or something, and go on committing fraud with confidence. It's not complex anymore. Pay to play.
The big difference was that she was in the medical field. She used her machines that worked unreliability on patients and caused actual damage to humans. Then she noticed that this could be a problem and switched to blood analyzer from Siemens. But she still continued to say that the machines do work. She lied to investors. I still feel her case is a lot different to what musk is doing. I think you can definitely say “coming next year” and actually needing 5 years. You cannot blatantly lie and harm people along the way
But what if you say that FSD is actually here and that the only reason you can't fully use it is regulations and then need an extra decade (at least -- still pending)? As one of many examples....
Are you a biochemist? Would the Theranos machine have worked with new tests using new reagents? Is the needed blood volume not similar to, for example, payload capacity? Are we discriminating against people who affect an unusual voice?
It wouldn't have worked, period. You can't use capillary blood for the kind of blood tests they were claiming to. It's statistically impossible because the sample isn't big enough and drawing more capillary blood doesn't improve the SNR. Two samples taken at the same time from different spots on the same finger can yield wildly different results.
Everyone in diagnostic medicine knows this (they've been dealing with this problem since the glucose finger prick test). That's why no biotech VC ever invested in Theranos and they had to get tech VCs and fancy board members like Henry Kissinger. A cursory glance at the proposal by someone qualified would have shut that down immediately, but tech VCs don't do due diligence anymore.
That's the point. As yet uninvented tests and reagents are the same kind of line of BS as "let's make the rocket bigger." While I have the advantage of having a mother who is an immunologist and did in fact work in developing diagnostics, all it really takes to call shenanigans is a knowledge of project management and critical path analysis. By the time you're launching 15 or 25 starship missions to refuel one on its way to the moon, the whole project is irrelevant.
It’s not a lack of due diligence, it’s a lack of prosecution of fraud. They think they can just unload to some sucker for a big payday. See also the entirety of cryptocurrency.
> They think they can just unload to some sucker for a big payday. See also the entirety of cryptocurrency.
That's also the entirety of the biotech VC industry, except even more so.
Biotech startups require far more capital to make it to market than tech startups, so biotech VCs take the role of early stage funding for R&D. Then the startup IPOs (with zero revenue and unlimited scientific risk) and uses that to fund its clinical trials, while the investors dump their stock. Then, because ramping up manufacturing and quality control takes even more money, the biotech startup sells out to a pharmaceutical company once its passed its trials or the results are promising enough to take the risk, closing the financing loop. Most of these startups stop existing before they even earn a single dollar in revenue, either because they fail or they're acquired by someone who can actually manufacture and distribute their product at scale. This has been the way of the industry for at least the last 20-30 years ever since the small molecule cliff hit like a brick wall.
So, the VC industry whose standard operating procedure is to unload companies onto public investors long before anyone even knows whether the drug or device would work, wouldn't touch Theranos with a thirty foot pole.
You might need to qualify that a bit harder or someone could quite easily point out that all of these worthless shitdribblers cause actual damage to humans.
They all lie, they all continue to claim that they hold the future in their feeble sticky hands.
Just to take, take, take.
You seem fixated on lying being a problem but only one of these two liars causes you to feel that her case is different? Maybe the difference between the two is in the lie of the beholder.
> Like if someone says we have this many users as a statement you have no idea what they are actually calculating
I think that's BS. User metrics are usually very explicitly defined (e.g. monthly or daily active users have always been clearly defined wherever I've worked, even if just for the sole reason that people collecting those numbers need to know what to count). User quality is definitely a gray area and estimating bot percentage has become increasingly difficult, but user metrics are not some ill-defined, fuzzy math notion.
Right I'm not saying that Zuck's staff doesn't know how to calculate MAU or ARR. I'm saying I'm not sure we can trust the 'median' (median on a scale of super-scrupulous to outright-dishonest) CEO is not counting things like inactive cohorts, newsletter subscribers, website hits when counting 'users'... or being very optimistic about whether a customer will renew when calculating 'recurring revenue'
I may be wrong! But I am definitely giving such claims the side-eye
For example, at a major social media company I worked at in the early 2010s, bots/spam users were deleted after earnings calls, not before. IIRC an employee had the temerity to ask "Is this honest behavior" in an all hands!??!
I'm 100% convinced that accidental website hits and bounces from unique IPs when viewing the ensuant shitty content counts as MAUs for most, if not all, major tech companies.
This is an area where deception is possible. For example, if the metric is background API calls, you can fake that too. What matters is how you define 'active users.' In fact, this is a common technique used in well known scam apps in Korea, often called 'vanity metrics.' Generating abusive users and background traffic that create no real business value, then packaging it as user growth. There are even people who specialize in this.
if someone says they have a billion users because they are connected to the doubleclick exchange... they aren't lying, they might be deceptive or simply foolish.
As part of due diligence, the buyer/investor should ask how these numbers are calculated and make their own judgement. Unfortunately I believe startups select for those who dance the border of deceptive and foolish.
I'm surprised there was no mention of Elizabeth Holmes. Whenever there is mention of criminal deception of any sort, she's like the poster child for it in my eyes. And I remember her accomplice who instead of admitting he was on the wrong side, kept blaming the journalist who tried to uncover the fraud, instead. He said (something along the lines of) "He (the journalist) kept coming at her.." as if she would've been able to magically solve the problem if she had enough time.
That was all I needed to know about what was wrong about valley culture.
> including the extension of U.S. Securities and Exchange Commission surveillance and whistleblower program, investor due diligence reform, and dedicated entrepreneurship education interventions
Wasn't the SEC essentially gutted to the point it's basically toothless right now?
I am torn on this issue, because I would love to disincentivize short-term thinking at the executive level, and I initially considered this a decent move in that regard.
"Entrepreneurs construct, perform, and protect illusory appearances (façades) that externally project high-growth performance to audiences while masking ventures’ actual underperformance."
This would accurately describe a some of the startups I've worked at. ;-P
I once worked at a startup that did this. They raised over $1m+ on a slideshow and a fake mockup while convincing investors they had a working product. This company was eventually acquired and swallowed up. From what I understand it didn't make it to the market they intended.
I wonder how it compares to small business fraud. I know of multiple frauds in non venture backed ecom and real estate development. In some cases the person involved seems to be a professional fraudster, having had no real employment outside of fraudulent businesses.
I see the title was changed; I agree with the new title (it’s much clearer and less inflammatory). I tend to use the original title by default, if it fits length requirements.
My thinking is that the post-ZIRP era, with its more limited funding, will probably require a lot more honesty, transparency, and vetting from founders. “Casting a wide net” makes more sense when funding comes cheap and easy.
"Facading" is a term that just uses more letters to call someone a liar or thief.
There's no need to beat around any bushes.
When your business culture rewards lying or theft then you have a real ethical problem that signals the need for strong regulatory reform and severe criminal penalties. These sanctions should be retroactively applied for all those who assumed they would be able to dance away scot-free. Asset confiscation, prison time, large financial fines should be distributed to all those liars and thieves, especially the ones who constructed the systems that used algorithmic adjustments to help destroy society or create surveillance operations that could be used against ordinary citizens in violation of privacy.
The more you force unrealistic expectations of exponential growth, the more founders engage in 'façading.' This feels a lot like multi-level marketing and a game of hot potato—keeping the early investors' returns safe by bringing in new capital.
The paper's concept of 'deep façading' follows the same pattern. When a product fails to generate sustainable value or revenue in the market, founders create fake metrics to protect the book returns of early investors and attract the next round of funding. Instead of being driven by real customer value, the company's valuation is inflated by the next investor's money—creating a multi-level pyramid.
The successful hot potato is WeWork, handed off to SoftBank and public market retail investors. The failed one is Theranos.
FWIW, I left a VC backed startup where I was an equal co-founder because my co-founder was committing securities fraud (blatant lying about customers and traction in investor update emails, amongst other things).
I presented all the evidence to the investors when I was leaving, and I was told that they'd rather let the startup die a natural death than suffer the "reputational harm" that'd come from going after the charlatan. ¯\_(ツ)_/¯
I'm thrilled someone has attempted to quantify the lies, fraud and deception that has been the norm here in Silicon Valley for decades. I've worked at startups, have friends who are entrepreneurs, everyone in my family has worked at startups, and there's no question that lying and deception are normal and expected here.
Isn't venture capital just playing along too, though? They also benefit from all the myth making and hype storms, even if they are technically getting defrauded while funding it.
They could actually audit the companies they invest in, and go after the frauds. The Nikola example is a great one--if anyone had looked carefully behind the marketing the fraud should have been obvious. But by and large they don't, really. Seems to be a tacit endorsement of the behavior.
ZIRP made it unprofitable to chase down fraud; money was too cheap and attention too scarce. We’ve been in a tightening cycle for a while now, but many still held out hope for another drop in interest rates. Now that rates are going crazy, I suspect we’ll see a shift to much tighter vetting and ongoing monitoring.
I wonder how this compares to other fields. Whenever you have a market like this, there's a giant incentive for fraud, and the more people cheat the stronger the incentive gets to the point that you lose if you don't cheat.
That being said -- for my own co. I did not fudge numbers at all. In fact I understated them sometimes. We raised less money than our competitors, which probably hurt us, but we also got very high quality investors that are not a giant pain to work with and are not idiots. Those investors in turn introduced me to others and to our current CEO (hired to replace myself, was my idea in part) and they're all high quality.
I'll take it. Working with shitty people sucks, and my guess is the people you get when you bullshit are themselves bullshitters and assholes.
I could have bullshitted like mad and raised stupid money during the COVID era fund raising bubble. I'd be left with shitty people though, and a waterfall you'd never clear, so you'd never see an exit unless you went insanely vertical.
The last part is a nuance a lot of people don't get: raise too much and/or on too high of a valuation and you will never clear the waterfall unless you get an 0.000001% super-unicorn outlier growth curve. Every $1M in valuation means you have to go into more and more rarefied air to see a good exit. At that point you're basically gambling. Gambling is a tax on people who can't do math.
The post-ZIRP observation resonates. Building a bootstrapped SaaS in Europe right now, I've noticed investors increasingly ask for verified metrics not just screenshots, but API-connected dashboards. It's almost like the market is self-correcting by making due diligence cheaper to do properly.
The real problem with façading is the selection effect downstream: founders who inflate metrics attract investors who expect inflation, creating a system where honesty becomes a competitive disadvantage. You end up filtering out exactly the people you'd want on your cap table.
“Our theoretical framework captures how entrepreneurs facing minor, wide, and extreme expectation-reality gaps engage in evermore sophisticated efforts to detach the venture’s externally projected appearance from its actual operational reality.”
Look, I’m not promoting fraud at all, but having been doing seed raising for the last eight months, there have been many times where I thought the only way to compete was by fudging the numbers (because everyone else is, basically). It’s one of several reasons I left this game and am pursuing non-traditional means of funding now.
Thank you for having an ethical standard and the will to adhere to it.
Was it fudging expected numbers (forecast), or fudging actual numbers (revenue, etc)?
VCs are looking for a long-tail, if you have a 1% chance at 5B - 1T market, this is more interesting and impactful than 10% chance at 5M market.
And yes, 1% chance of success is considered to be unrealistic by common sense standards.
IME, it's about pushing you to overextend on the forecast, so that when you don't meet it, they get more control or claw back funds promised or given.
Fudging actual numbers is a dangerous and illegal game to play and never pays off, except in the edge cases (e.g., Enron... but usually you have to pay the Piper).
Interesting, this presents an meta for an early stage investor. Fund a company with a BS forecast based on your ability to make money on the claw back provisions.
You're never going to make money from that. By the time you're presented with the opportunity to use them, you're on the losing end.
From my experience they wanted you to demonstrate enough metrics that would have justified NOT ever getting VC funding. It feels like they are just becoming lazy.
Ergodicity. For you as an individual startup it is low but a VC looks at a portfolio and at a given size it is almost guaranteed to win.
I spent a few years hanging around the VC-adjacent scene in a major city, met quite a few of them (because I'm that way. elevator docent during events... priceless).
There is publicly performed theater around VCs which is pretty consistent, taught in incubators, etc., etc. So that's how they manage set and setting (grooming) for the marks. Internally there are certain tells, that they must act a certain way. There are arbitrary character tests and whatnot which provoke a "culture" if you will, similarly to how computer languages and tech stacks form distinctive cultures if left unchecked; there could be self-selecting pressures (for these behaviors) as well. This is unsurprising to me as someone who analyzed voting patterns, and was asked numerous times variations on the question "is it something in the water or 'new car smell'?" (I don't have an answer for that question.)
However VCs are much more stovepiped and cliquish concerning their actual selection process than people realize, I've heard it publicly described as "mafia like" by someone who I worked for and whose name many would recognize. I don't understand why this person, like so many others, invested so much effort... enough to get some serious butthurt IMO.
It's a distraction, it effectively destroyed a different company I was working for.
I'm guessing investors understand that there's high probability of the numbers being 'optimistic'.
My understanding so far is that as humans we get bounded by our emotions, morals, incentives and fears. On the other hand you are competing against capitalism that tries to use any possible means to make profits. It treads along every possible path of whats not completely illegal. What benefits it is that either the laws are not yet defined to cover those situations or they are hazy enough that there is an escape hatch. You name any big company and they have gone through the path of doing something that was illegal or questioned. Just like critical mass or escape velocity, if you are big enough you get through the hurdles or otherwise you get stuck and make a good topic in some ones paper like this.
What is nontraditional? Seems like it could be even more rife with fraud with lower oversight.
Probably a bad qualifier. Maybe non-VC would have been better. Myself and my co-founder are trying to raise via a syndicate of like-minded investors/angels in lieue of the "traditional" VC dance.
How is that going? I ask because just recently I read a post from someone I know who is getting out of the angel investing game. Her primary complaint is that in a couple early stage investments she made that then were successful enough to go on to a VC series round that early angel investors got shafted. That is, there was a strong desire from VCs to "clean up the cap table" and buy out early stage angels just as the business was starting to accelerate. There was some definite bitterness in her tone, feeling like she went out on a limb for some founders before the business was proven out, and then got dumped once the deeper pockets came along.
I don't know the details of her situation, what else she could have done to protect her investments, or how common an experience that was, but there were many comments in agreement under her post, so I'm just curious if it's widespread.
This is where PE came from originally, but then scaled to commercial bank / pension fund levels of investment. At least VC and Founders are aligned and honest about their goals (to the moon!); I've seen PE destroy more solid / non-rocketship businesses than VC
There’s more to capital than dilutive capital
But yes lots of ways to lose money with even less recourse
You highlighted the basis for widespread corruption. At some point you no longer do it to get an unfair advantage, you do it because without it you get an unfair disadvantage. Widespread fraud is no different.
Good on you for saying no to committing fraud! It really sucks that this is unusual enough that it warrants a bit of positive feedback!
I’m really not trying to virtue signal. There’s a lot more nuance to my reasoning to leave the traditional VC game. All of them led me to declaring it fundamentally incompatible with my world view. Which then led me to my current path of attempting to form a syndicate of like-minded individuals.
But this study validates a lot of feelings I’ve had over the last several months. There’s a ton of people that never get caught, of course.
Oh, I did not take it as virtue signaling at all! I do actually admire you for looking at a dirty game and saying "I will not play this, I will find a better way."
If I ever win the lottery, I'm going to create the Joseph Welch Foundation. The foundation will give monetary awards to people who have demonstrably pushed back against corruption, lies, and bullshit.
For those who don't recognize the name, Joseph Welch is who said "Have you no sense of decency, sir, at long last, have you left no sense of decency?" to Joseph McCarthy.
Too few people remember Welch. McCarthy was the asshole but his name is remembered more. I see this as an error we have made with our societal memory. It would be better to remember Welch, and only remember McCarthy as "that red scare guy".
What we should be doing, as a civilized society with rules and a regulatory apparatus that's woefully underused, is looking at the dirty game and saying "The game is over. The people/government is going to finally crack down on fraud and people who play the game are going to prison."
I absolutely agree. We need strong rule of law, and we need to start holding everyone accountable to the law.
The era of "I'm too rich / popular / influential / 'important' to prosecute" must end.
well i've got some bad news, that era has now entered its maximum power phase. Our government has literally been systematically deconstructed to become unable to govern.
> If I ever win the lottery
Now there’s a disgusting game.
It is, in the sense that it often acts as a tax on people who can least afford it.
The occasional lottery ticket does not particularly affect my budget, so I buy one now and then with the intent to use it for good should I win.
> If I ever win the lottery, I'm going to create the Joseph Welch Foundation. The foundation will give monetary awards to people who have demonstrably pushed back against corruption, lies, and bullshit.
If you do that, given enough time, you will be awarding people that learnt how to game the award. Back to corruption, lies and bullshit.
A lot of 'numbers' startups cite are basically fake I think. Like if someone says we have this many users as a statement to TechCrunch you have no idea what they are actually calculating
But there is a clear line that gets crossed if you start actually making a database of millions of synthetic users and that's what happened with 'Frank' that sold to JP Morgan and eventually the founder was prosecuted
>"A lot of 'numbers' startups cite are basically fake I think."
I like Ed Zitron's reporting on the AI industry (though I disagree with him on AI's potential capabilities).
I wonder how much of AI-related revenue are because of accounting fiction rather than actual cash.
Either way, I think the stock market is as disconnected as it has ever been with actually ground reality of the US economy and industry.
Not just users, but number of companies. So many startups list out all the companies using their products, who also happen to be an army of startups. I doubt they're all using each others products, just doing what they can to juice each companies perceived metrics.
Supposedly B2B SaaS companies in YC have been known to enter into agreements to “buy” each others’ products so they can all book more users and revenue despite a single dollar not changing hands.
The oh so celebrated "Fake it till you make it"
https://youtube.com/shorts/VpyLcfDsmNg
And then she started paying for facials and stuff as part of her necessary legal fees or something.
"But your honor! I need to look presentable to the jury when they're convicting me of rampant fraud!"
Internet being full of bots, I usually do the s/users/bots/ automatically in my mind.
Even some users are just bots... (At least their behavior is/are)
In the current environment I doubt Elizabeth Holmes would go to prison. She would be saying the machine would work by early next year. After all a drop of blood is just a smaller quantity. Making the machine work is just an engineering problem.
If she were really clever she would recruit a social media army of all the weird conspiracy theorists who think "medbeds" are real.
Of course now we know that a drop of capillary blood containing interstitial fluid and a random mix of venous and arterial blood is unsuitable for most blood tests. At least you will have googled that if you're an Elon stan preparing to tell me how they're not comparable.
Cool thought process, but the real reason Elizabeth Holmes would not go to prison if she pulled that shit today is much, much simpler: She would know to make a nice sized donation to the current administration (or a sweet business deal for one of his family members), and the justice system would simply be completely hands-off her. She'd give 5% equity to Jared Kushner or something, and go on committing fraud with confidence. It's not complex anymore. Pay to play.
The big difference was that she was in the medical field. She used her machines that worked unreliability on patients and caused actual damage to humans. Then she noticed that this could be a problem and switched to blood analyzer from Siemens. But she still continued to say that the machines do work. She lied to investors. I still feel her case is a lot different to what musk is doing. I think you can definitely say “coming next year” and actually needing 5 years. You cannot blatantly lie and harm people along the way
But what if you say that FSD is actually here and that the only reason you can't fully use it is regulations and then need an extra decade (at least -- still pending)? As one of many examples....
Are you a biochemist? Would the Theranos machine have worked with new tests using new reagents? Is the needed blood volume not similar to, for example, payload capacity? Are we discriminating against people who affect an unusual voice?
It wouldn't have worked, period. You can't use capillary blood for the kind of blood tests they were claiming to. It's statistically impossible because the sample isn't big enough and drawing more capillary blood doesn't improve the SNR. Two samples taken at the same time from different spots on the same finger can yield wildly different results.
Everyone in diagnostic medicine knows this (they've been dealing with this problem since the glucose finger prick test). That's why no biotech VC ever invested in Theranos and they had to get tech VCs and fancy board members like Henry Kissinger. A cursory glance at the proposal by someone qualified would have shut that down immediately, but tech VCs don't do due diligence anymore.
> It wouldn't have worked, period.
That's the point. As yet uninvented tests and reagents are the same kind of line of BS as "let's make the rocket bigger." While I have the advantage of having a mother who is an immunologist and did in fact work in developing diagnostics, all it really takes to call shenanigans is a knowledge of project management and critical path analysis. By the time you're launching 15 or 25 starship missions to refuel one on its way to the moon, the whole project is irrelevant.
It’s not a lack of due diligence, it’s a lack of prosecution of fraud. They think they can just unload to some sucker for a big payday. See also the entirety of cryptocurrency.
> They think they can just unload to some sucker for a big payday. See also the entirety of cryptocurrency.
That's also the entirety of the biotech VC industry, except even more so.
Biotech startups require far more capital to make it to market than tech startups, so biotech VCs take the role of early stage funding for R&D. Then the startup IPOs (with zero revenue and unlimited scientific risk) and uses that to fund its clinical trials, while the investors dump their stock. Then, because ramping up manufacturing and quality control takes even more money, the biotech startup sells out to a pharmaceutical company once its passed its trials or the results are promising enough to take the risk, closing the financing loop. Most of these startups stop existing before they even earn a single dollar in revenue, either because they fail or they're acquired by someone who can actually manufacture and distribute their product at scale. This has been the way of the industry for at least the last 20-30 years ever since the small molecule cliff hit like a brick wall.
So, the VC industry whose standard operating procedure is to unload companies onto public investors long before anyone even knows whether the drug or device would work, wouldn't touch Theranos with a thirty foot pole.
> but tech VCs don't do due diligence anymore
They hope they can cash out before the bubble bursts, whatever that bubble is.
Tell that to Kyle Shanahan, whose Tesla got into a big accident while on autopilot...
> caused actual damage to humans
You might need to qualify that a bit harder or someone could quite easily point out that all of these worthless shitdribblers cause actual damage to humans. They all lie, they all continue to claim that they hold the future in their feeble sticky hands. Just to take, take, take. You seem fixated on lying being a problem but only one of these two liars causes you to feel that her case is different? Maybe the difference between the two is in the lie of the beholder.
The medical field is filled with charlatans and quacks. Elizabeth Holmes went to jail because she defrauded the wrong people.
> Like if someone says we have this many users as a statement you have no idea what they are actually calculating
I think that's BS. User metrics are usually very explicitly defined (e.g. monthly or daily active users have always been clearly defined wherever I've worked, even if just for the sole reason that people collecting those numbers need to know what to count). User quality is definitely a gray area and estimating bot percentage has become increasingly difficult, but user metrics are not some ill-defined, fuzzy math notion.
Right I'm not saying that Zuck's staff doesn't know how to calculate MAU or ARR. I'm saying I'm not sure we can trust the 'median' (median on a scale of super-scrupulous to outright-dishonest) CEO is not counting things like inactive cohorts, newsletter subscribers, website hits when counting 'users'... or being very optimistic about whether a customer will renew when calculating 'recurring revenue'
I may be wrong! But I am definitely giving such claims the side-eye
The “Active” part of “Monthly Active Users” can mean an awful lot of things
For example, at a major social media company I worked at in the early 2010s, bots/spam users were deleted after earnings calls, not before. IIRC an employee had the temerity to ask "Is this honest behavior" in an all hands!??!
I'm 100% convinced that accidental website hits and bounces from unique IPs when viewing the ensuant shitty content counts as MAUs for most, if not all, major tech companies.
Seems like your “increasingly difficult” part is kinda what they meant.
This is an area where deception is possible. For example, if the metric is background API calls, you can fake that too. What matters is how you define 'active users.' In fact, this is a common technique used in well known scam apps in Korea, often called 'vanity metrics.' Generating abusive users and background traffic that create no real business value, then packaging it as user growth. There are even people who specialize in this.
if someone says they have a billion users because they are connected to the doubleclick exchange... they aren't lying, they might be deceptive or simply foolish.
As part of due diligence, the buyer/investor should ask how these numbers are calculated and make their own judgement. Unfortunately I believe startups select for those who dance the border of deceptive and foolish.
> they aren't lying, they might be deceptive
I think that’s well within the bounds of what most people would consider to be a “lie”. The legal system has more specific definitions, though.
I'm surprised there was no mention of Elizabeth Holmes. Whenever there is mention of criminal deception of any sort, she's like the poster child for it in my eyes. And I remember her accomplice who instead of admitting he was on the wrong side, kept blaming the journalist who tried to uncover the fraud, instead. He said (something along the lines of) "He (the journalist) kept coming at her.." as if she would've been able to magically solve the problem if she had enough time.
That was all I needed to know about what was wrong about valley culture.
Seems they use the nickname 'ScaleX' to discuss Theranos
> including the extension of U.S. Securities and Exchange Commission surveillance and whistleblower program, investor due diligence reform, and dedicated entrepreneurship education interventions
Wasn't the SEC essentially gutted to the point it's basically toothless right now?
The SpaceX IPO is perhaps the latest and most damning outcome of that gutting.
Seems the current SEC head is a moron. https://finance.yahoo.com/markets/article/sec-chair-defends-...
I am torn on this issue, because I would love to disincentivize short-term thinking at the executive level, and I initially considered this a decent move in that regard.
I mean, maybe a disinterested moron is better for some things? Would be great if companies only had to report once a year.
"Entrepreneurs construct, perform, and protect illusory appearances (façades) that externally project high-growth performance to audiences while masking ventures’ actual underperformance."
This would accurately describe a some of the startups I've worked at. ;-P
This is literally the American way.
Everyone does this at every level, from Execs down to middle managers, for every possible metric.
This is what Stanford kids do. Read "How to Rule the World: An Education in Power at Stanford University" by the theo guy.
Great suggestion. Thank you.
I once worked at a startup that did this. They raised over $1m+ on a slideshow and a fake mockup while convincing investors they had a working product. This company was eventually acquired and swallowed up. From what I understand it didn't make it to the market they intended.
I wonder how it compares to small business fraud. I know of multiple frauds in non venture backed ecom and real estate development. In some cases the person involved seems to be a professional fraudster, having had no real employment outside of fraudulent businesses.
I see the title was changed; I agree with the new title (it’s much clearer and less inflammatory). I tend to use the original title by default, if it fits length requirements.
My thinking is that the post-ZIRP era, with its more limited funding, will probably require a lot more honesty, transparency, and vetting from founders. “Casting a wide net” makes more sense when funding comes cheap and easy.
I think this is accurate and a reflection of the pathological insecurity that leads someone to want to start a startup.
"Facading" is a term that just uses more letters to call someone a liar or thief.
There's no need to beat around any bushes.
When your business culture rewards lying or theft then you have a real ethical problem that signals the need for strong regulatory reform and severe criminal penalties. These sanctions should be retroactively applied for all those who assumed they would be able to dance away scot-free. Asset confiscation, prison time, large financial fines should be distributed to all those liars and thieves, especially the ones who constructed the systems that used algorithmic adjustments to help destroy society or create surveillance operations that could be used against ordinary citizens in violation of privacy.
The more you force unrealistic expectations of exponential growth, the more founders engage in 'façading.' This feels a lot like multi-level marketing and a game of hot potato—keeping the early investors' returns safe by bringing in new capital.
The paper's concept of 'deep façading' follows the same pattern. When a product fails to generate sustainable value or revenue in the market, founders create fake metrics to protect the book returns of early investors and attract the next round of funding. Instead of being driven by real customer value, the company's valuation is inflated by the next investor's money—creating a multi-level pyramid.
The successful hot potato is WeWork, handed off to SoftBank and public market retail investors. The failed one is Theranos.
FWIW, I left a VC backed startup where I was an equal co-founder because my co-founder was committing securities fraud (blatant lying about customers and traction in investor update emails, amongst other things).
I presented all the evidence to the investors when I was leaving, and I was told that they'd rather let the startup die a natural death than suffer the "reputational harm" that'd come from going after the charlatan. ¯\_(ツ)_/¯
I'm thrilled someone has attempted to quantify the lies, fraud and deception that has been the norm here in Silicon Valley for decades. I've worked at startups, have friends who are entrepreneurs, everyone in my family has worked at startups, and there's no question that lying and deception are normal and expected here.
If this was applied to all of commercial organizations equivalently, the entirety of our society would probably grind to a halt
Absolutely not. Silicon Valley powers its own unique type of reality distortion field.
Have you ever bought a car near a military base?
Isn't venture capital just playing along too, though? They also benefit from all the myth making and hype storms, even if they are technically getting defrauded while funding it.
They could actually audit the companies they invest in, and go after the frauds. The Nikola example is a great one--if anyone had looked carefully behind the marketing the fraud should have been obvious. But by and large they don't, really. Seems to be a tacit endorsement of the behavior.
ZIRP made it unprofitable to chase down fraud; money was too cheap and attention too scarce. We’ve been in a tightening cycle for a while now, but many still held out hope for another drop in interest rates. Now that rates are going crazy, I suspect we’ll see a shift to much tighter vetting and ongoing monitoring.
façading has made Elon Musk very rich.
Fine line between articulating a vision well or marketing vs just lying.
I wonder how this compares to other fields. Whenever you have a market like this, there's a giant incentive for fraud, and the more people cheat the stronger the incentive gets to the point that you lose if you don't cheat.
That being said -- for my own co. I did not fudge numbers at all. In fact I understated them sometimes. We raised less money than our competitors, which probably hurt us, but we also got very high quality investors that are not a giant pain to work with and are not idiots. Those investors in turn introduced me to others and to our current CEO (hired to replace myself, was my idea in part) and they're all high quality.
I'll take it. Working with shitty people sucks, and my guess is the people you get when you bullshit are themselves bullshitters and assholes.
I could have bullshitted like mad and raised stupid money during the COVID era fund raising bubble. I'd be left with shitty people though, and a waterfall you'd never clear, so you'd never see an exit unless you went insanely vertical.
The last part is a nuance a lot of people don't get: raise too much and/or on too high of a valuation and you will never clear the waterfall unless you get an 0.000001% super-unicorn outlier growth curve. Every $1M in valuation means you have to go into more and more rarefied air to see a good exit. At that point you're basically gambling. Gambling is a tax on people who can't do math.
The post-ZIRP observation resonates. Building a bootstrapped SaaS in Europe right now, I've noticed investors increasingly ask for verified metrics not just screenshots, but API-connected dashboards. It's almost like the market is self-correcting by making due diligence cheaper to do properly.
The real problem with façading is the selection effect downstream: founders who inflate metrics attract investors who expect inflation, creating a system where honesty becomes a competitive disadvantage. You end up filtering out exactly the people you'd want on your cap table.
Business as usual for the west.
Talk about every other countries ethics while being the number one thief through narrative capture