AngelList And The F Word

Five years ago Naval Ravikant of Angel List said that “spectacular fraud will occur in angel investing.” He went on to say “Entrepreneurs will exploit investors”.

While we’ve still been spared major fraud, corner-cutting/fudging/faking it/white lies, on the other hand, are extremely prevalent on the part of startup teams.

Five years have passed and fraud is still being seen as the F word. Recently when I used the provocative terms “Startups lie” I heard in response: “you won’t get far using the word lie.” And then I was told about a funding team making up information to attract potential hires.

I already feel I’ve made it far. Now I’d like to help make the early stage investing process more efficient.

This is what we came across in the last several months while building our product and suite of services:

• a founder who raised millions of dollars from top-tier investors completely misrepresented his educational background;
• a CEO who puts the name of his former CTO onto all of the materials he puts out (for fundraising, hiring and PR purposes) hasn’t worked with the former CTO for 2 1/2 years;
• a startup says it has 10 customers — there are actually 8, 4 of who are users, 4 are customers and only 2 are paying customers;
• a founding CEO hired a business guy to go through one of the top 3 accelerator programs in the world as the company’s official CEO while he was involved in other businesses. The startup took accelerator funding and convertible note funding on Demo Day and was out of business 3 months later;
• I was helping friends on a project in the Bay Area over the summer and we were filming startups that graduated from 500 Startups and YC (early 2015). About 20% of the companies we called (a sample of the graduating classes) told us they are no longer together. A couple used the term “disbanded.” Most of them took funding on Demo Day;
• a team says they have a product that will be ready to support 10,000 users in 2 weeks. What they have is some active wireframes. They need 6 months at a market cost of $100k to build a working product. That will be funded out of the $250k investors are going to put in for user acquisition;
• a startup that is currently raising money lists person XYZ as “Chief Technology Officer” on the company’s website; as “Founding CTO” in the pitch deck and as “former Founding CTO” on AngelList. The person no longer works with the startup;
• a founder who said he worked for Google did work for Google… through a subcontractor 5 years ago. The project lasted 6 hours;
• a founder met an angel investor, told him about an idea (he was loosely kicking around) and when he saw the angel’s eyes light up he went home, registered a domain name, did AngelList, put up a WordPress site, together with totally fabricated client testimonials and shot off a deck before the sun came up the next morning. Investors wired $275k two weeks later.

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We all keep running around saying “most startups fail.” But where did those figures come from? How did we arrive at 9 out of 10 startups fail? I’m sure when we deep dive into these numbers (and we’re planning on doing just that) we’ll find out that a lot of those 9 were never intended to be companies. They were ghost ships looking for a port.

We’re actually building a tool to fact check the information startups are putting out and will launch this year. Our team is already working with scores of seed and angel investors vetting if what’s in a deck, a one-pager, on a web-site and in a LinkedIn profile is real before the sunk cost fallacy kicks in. This isn’t due diligence. We’re not looking to see if the startup is a good investment. Just whether or not the information put out into the world is factually correct.

We believe that what the Romans said still rings true: Paper endures all. It’s easy to write something. Especially on-line.

We don’t look at this as an ethical or moral issue. We don’t even address the legal implications at this stage. We believe that false information in these sources makes startup fundraising much less efficient (slower and more expensive).

This is already important but will become even more so as retail investors clamor into the early investment space. Title III or not, people are already investing in startups with money they’ve put away for retirement, have saved for their children’s education or even borrowed. These funds often make their way into the startups as advances or loans (because they’re nor accredited investor).

I don’t believe that a legal disclaimer is of adequate service to the community. What Naval said will happen if we don’t address it proactively.

I’ll leave you with a couple of his slides: