“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).
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.
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.
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.
> 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?
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.
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’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.
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
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.
"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
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)_/¯
"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.
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.
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.
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.
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.
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).
But yes lots of ways to lose money with even less recourse
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.
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".
The era of "I'm too rich / popular / influential / 'important' to prosecute" must end.
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.
Now there’s a disgusting game.
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.
Wasn't the SEC essentially gutted to the point it's basically toothless right now?
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
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.
https://youtube.com/shorts/VpyLcfDsmNg
"But your honor! I need to look presentable to the jury when they're convicting me of rampant fraud!"
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.
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.
They hope they can cash out before the bubble bursts, whatever that bubble is.
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.
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.
I may be wrong! But I am definitely giving such claims the side-eye
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 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.
That was all I needed to know about what was wrong about valley culture.
This would accurately describe a some of the startups I've worked at. ;-P
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)_/¯
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 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.
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.
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.
Talk about every other countries ethics while being the number one thief through narrative capture