Moral of the Story: Start up scandals and our takeaways from them
Scandals. Dupes. Frauds. Failures.
Like it or not, these words thrive in the underbelly of the Startup ecosystem. With more startups failing than seeing the light of the day, it is only deemed natural that entrepreneurs sometimes engage in activities which don’t necessarily stem out of clean chits.
The startup ecosystem today has a rostrum of companies, founders and employees who at some point have indulged in activities which have landed their ventures in a soup.
Whether it is the uproar of the #metoo movement which brought the employees and founders all alike to the forefront and take ownership of their actions. Or the wave of data leaks that had engulfed the big honchos of the startup world and brought them to the public eye. The ecosystem is privy to making headlines in the infotech world.
While it is true that some of these failures and dupes stem out of the plain bad understanding of the product or the market, there is a significant amount of other failures which are a result of a con which was long planned and meticulously executed.
Following are a couple such scandals along with the reasons made them crash and burn so bad.
Burn baby Burn — Fyre Festival
After 8 lawsuits and six years in prison, we can collectively come to the conclusion that Fyre Festival was a colossal failure. A venture which started out as an application developed to aid people with talent booking managed to fail and disappoint at every level of its functionality.
Billy McFarland, the man behind the vision, along with Ja Rule set out to revolutionise the music festival scene as a marketing gimmick for the Fyre application. In no time, the focus of the venture shifted completely from developing the product to overselling a dream which seemed far fetched from the get-go.
Social media marketing or “Influencer Marketing” was the targeted way to get the word out about the festival . That will, till date, remain the only aspect of the whole festival which managed to deliver exactly what it set out to do. The word got out. Big names were attached to the label and then began the downfall of this mammoth of a music festival.
Billy managed to botch every aspect of the festival. That included research, planning, preparation, budgeting, communication, marketing, catering, accommodation, security, artist relations, and legal aspects. Artists pulling out, people being stranded, fights breaking out, location changes, you name it and that issue was easily taking the centre stage at the festival.
The dream had finally turned to a nightmare. Flames of the Fyre Festival had combusted not just for the ones who paid to party, but also on the local people of the island who helped organizers build whatever little was that of the festival. The aftermath of what was left behind and the effect on the people was heartbreaking, to say the least. One restaurant owner in the documentary admits she stumped $50,000 of her life savings catering for Fyre Festival in the build-up to the event.
So what went wrong?
Everything. From logistics to execution. Fyre Festival is a classic example of a vision consuming an entrepreneur to the level where he/she alter their reality to fit that dream.
Was Fyre an elaborate Ponzi Scheme? Maybe yes.
But at some point it was also a dream and vision of an entrepreneur, looking for that breakthrough. A vision which was devoid of reality check which ultimately led to its doom.
Lesson Learnt — Reality Check
While visionaries create the ultimate breakthroughs. It is the reality checks at every step of that ultimate dream, that allows an entrepreneur to follow through.
Dream. Dream Big. Make sure that your capabilities and that of the team around you can sustain the dream.
Blood, Sweat, and Tears — Theranos Technology
Fraud is complicated. The people committing it often live in such a warped world that when the rest of us question what happened — why did they do it? How did they think they’d get away with it? — answers are elusive. Fraud’s perpetrators don’t live in reality. They can fool themselves as much as they fool others. The bigger the fraud, the truer that becomes. So, of course, these things don’t make any sense. You can’t apply rational analysis to an irrational mind.
Theranos is a classic tale of unbridled ambition, unfettered arrogance, and unethical actions. Several reports around the scandal disclosed the unreliability of the company’s blood testing device, how infrequently that device was actually used on tests the company conducted, and other lies that enticed both investors, customers, and corporate partners. The lies and frauds resulted in federal charges against founder Elizabeth Holmes, and the company’s second in command. The two continued to deny the charges where they defrauded investors, who lost nearly $1billion. They have been accused of defrauding doctors and patients as well by providing possibly inaccurate test results that could have resulted in improper treatment and prescription decisions.
Theranos story clearly emulates the Silicon Valley culture, about what happens when ambitious people with big dreams get so blind with making their ideas succeed that they cross lines of integrity and ethics and what courage it takes to stand up and report the wrongdoings in the face of legal and other pressures.
So what went wrong?
The biggest blunder Holmes made was trying to emulate the Silicon Valley“ fake it till you make it “ culture to health care. Applying the so-called loose ethics of the Silicon Valley to a sector as poignant as health, in turn, was a major reason for the heat the venture faces. To quote Carreyrou’s book, “Bad Blood, “This wasn’t just a corporate fraud, this was a corporate fraud in which the public health was put at risk, and most people don’t have any tolerance for that.”
Lesson Learnt — Right Place,Right Time
Not every success mantra you have read in the book will stick. Assessing and knowing which area , sector and market to apply which mantra is the key to a well aware and calculated decision maker, a quality which comes really handy in an entrepreneur.
Rallying the Riot: WrkRiot Fiasco
A new business often comes under the scanner due to stress, bad communication, and the occasional late pay check. But this story takes the cake.
WrkRiot was founded by 36-year old Issac Choi in Santa Clara, with the now very ironic tagline, “no games, just jobs.” Formerly called 1for.one and JobSonic, it looked good on paper — but probe just a little and all sorts of inconsistencies crop up. Using at least four different names, Choi falsified his educational and personal history and personal wealth and scammed at least a dozen employees before being caught by authorities.
The situation was first brought to light when a former employee Penny Kim wrote a Medium post titled, “I got scammed by a Silicon Valley Startup” on August 18, 2016.
From the get-go, Kim was burned by Choi. When she flew to California after signing on what seemed like a pretty good deal, she quickly began noticing some inconsistencies. Way more people had been hired since she was interviewed. Many of the employees where Chinese here on Visas. Another bunch had been poached from a company across the hall. And her first pay check was late, which she later received as a cashier’s check but without any bonus attached to it. Photoshopped wire transfers, unaccounted for loans all culminated to WrkRiot limping its way to a point where advisors and investors of the company pulled out, especially when the FBI was brought to investigate Choi. WrkRiot CEO Isaac Choi was indicted on June 8, 2017. He pled guilty on February 5, 2018, and was sentenced on May 24, 2018. Unfortunately, he’s not going to spend any time in prison — beyond paying back those he cheated, he was sentenced to time served.
So what went wrong?
WrkRiot is the almost perfect dupe of the Silicon Valley and the reason behind the downfall of this almost perfect dupe has been perfectly summarised by Bernie Madoff, of the infamous Madoff Investment scandal. Fifteen months before his Ponzi scheme unraveled, Bernie Madoff made an astounding comment. “In today’s regulatory environment, it is virtually impossible to violate the rules,’ he told an audience in 2007. “This is something the public doesn’t really understand. It is impossible for a violation to go undetected. Certainly not for a considerable period of time.”
Lessons Learnt — Observe
Had Kim not observed irregularities in the core functioning of WrkRiot, the innumerable cons that Choi had been carrying out for multiple years wouldn’t have seen the light of the day. Being wary of your surroundings and working environment contributes in a significant way in gauging the trends and functioning of the market and the ecosystem which comes in very handy while chalking out a plan for your venture.
The Bite of the Bit: The Arrest the exposed the Multilevel Marketing (MLM) scheme
2017, was the year of bitcoins with the valuation of the cryptocurrency shooting up to $20k. However, in India, it was the arrest of Amit Bharadwaj, the infamous cryptocurrency guru, and visionary and a host of others running a multi-level marketing scheme that made headlines.
The plot was simple, Bharadwaj would lure in the doe-eyed investors through pomp and show, selling a cryptocurrency territory to a curious but clueless audience. Bhardwaj would promise 10% returns while asking people to invest in Bitcoin through his MLM schemes. Where it might have looked like a win-win situation if it would have been a legitimate currency. However, Bhardwaj would collect the investors’ money in Bitcoin and promise the 10% return in Bitcoin itself. This was not just an inflated offer but actually, a fraud one — no one can return more Bitcoins than they actually collect.
Once the investors got wind of this Ponzi scheme, a slew of similar fraud schemes was soon reported by crypto traders in the media. On March 30,2018 Bhardwaj was arrested and eight others were held later in the then biggest Bitcoin scam in the country worth $300 Mn. After this, the police made two more arrests — Sahil Baghla (former Bluegape founder) and Nikunj Jain (former Frankly.me founder and an angel investor), founder of crypto mining startup Darwin Labs, were also arrested in connection with Bhardwaj’s crypto Ponzi scheme.
What went wrong?
Betting on an unknown territory. Since the Bhardwaj scam, India’s cryptocurrency sector has been hit by a number of other such frauds, mostly MLM schemes, busted by the police and investigative agencies of different states. Which by its extension has forced the Indian government to issue a mandate that made it clear that cryptocurrencies are neither a legal tender nor an asset-backed by any physical property. Cryptocurrencies remain unregulated till date and hence cryptocurrency-backed MLM schemes are illegal in India.
Lesson Learnt — Calculated Risks
Half baked knowledge is dangerous. Do the thorough due diligence before committing to or taking up any new project or navigating an unknown territory. Test the waters before going all in.
If one tries to look for a pattern between the scandals and frauds, they would set themselves up for failure as there is none. Each of these above-mentioned stories has its driver energies set out in different spaces. But the one common thread tying them all together is that the ultimate goal always comes down to the scalability of the venture.
The allure of the bigger picture is always strong.
Whether an entrepreneur chooses to LEAK their way to it or REACH out on their own accord.
That is exactly where the choice lies.
