4 ms·

Analyzing data from Silicon Valley ventures and founders prosecuted for fraud

198 points by iamnothere 2mo ago

deleted 2mo ago
[deleted]
firasd 2mo ago
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
- hn_throwaway_99 2mo ago
  > 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.
  - dd8601fn 2mo ago
    Seems like your “increasingly difficult” part is kinda what they meant.
  - firasd 2mo ago
    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
    - stanleykm 2mo ago
      The “Active” part of “Monthly Active Users” can mean an awful lot of things
      - a34729t 2mo ago
        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!??!
    - hansvm 2mo ago
      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.
  - lumost 2mo ago
    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.
    - zbentley 2mo ago
      > 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.
  - jdw64 2mo ago
    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.
- abixb 2mo ago
  >"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.
- Zigurd 2mo ago
  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.
  - umpalumpaaa 2mo ago
    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
    - Zigurd 2mo ago
      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?
      - akiselev 2mo ago
        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.
- giwook 2mo ago
  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!"
- 7373737373 2mo ago
  The oh so celebrated "Fake it till you make it" https://youtube.com/shorts/VpyLcfDsmNg https://youtube.com/shorts/VpyLcfDsmNg
- mindtricks 2mo ago
  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.
  - pclmulqdq 2mo ago
    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.
- pvtmert 2mo ago
  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)
imadierich 2mo ago
Business as usual for the west. Talk about every other countries ethics while being the number one thief through narrative capture
jdw64 2mo ago
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.
neya 2mo ago
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.
- firasd 2mo ago
  Seems they use the nickname 'ScaleX' to discuss Theranos
aliasxneo 2mo ago
“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.
- sjsdaiuasgdia 2mo ago
  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!
  - aliasxneo 2mo ago
    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.
    - sjsdaiuasgdia 2mo ago
      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".
UltraSane 2mo ago
façading has made Elon Musk very rich.
- rurban 2mo ago
  He has at least some incredibly good products
doodlebugging 2mo ago
"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.
AndrewKemendo 2mo ago
If this was applied to all of commercial organizations equivalently, the entirety of our society would probably grind to a halt
- RetroTechie 2mo ago
  Absolutely not. Silicon Valley powers its own unique type of reality distortion field.
  - AndrewKemendo 2mo ago
    Have you ever bought a car near a military base? How about getting a check cashed or a payday loan? Furniture financing is almost 100% a scam Pharma pricing?
mikelgan 2mo ago
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.
nlpnerd 2mo ago
Fine line between articulating a vision well or marketing vs just lying.
27183 2mo ago
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.
- iamnothere 2mo ago
  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.
  - ArcHound 2mo ago
    I wonder. Did we get ZIRP because we had so many profitable ideas back in the day or were those ideas only viable because of ZIRP? Meaning roughly: these tech startups guys are regularly pumping out multi-million companies and all they need is two college dropouts with laptops and an initial investment. So if I see two college dropouts I should give them money, right?
    - iamnothere 2mo ago
      We got ZIRP because Western governments decided to play “kick the can” after 2008, and most lowered rates as close to zero as they could get away with while engaging in quantitative easing. This created an environment where lending was very cheap, effectively “free money”. IMHO this along with the contemporaneous smartphone/internet services boom is what lead to the previous environment, where you could afford to take on many failures as long as you had a few unicorns. Now that the industry is mature and funds are tighter, this approach doesn’t make sense anymore.
sohrob 2mo ago
"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
- timacles 2mo ago
  This is literally the American way. Everyone does this at every level, from Execs down to middle managers, for every possible metric.
  - ArcHound 2mo ago
    The issue is that Russians have the patent on this method (see e.g. the Potemkin village). The Americans were seen as the god-honest people speaking the uncomfortable truth to people in power, supported by the 2A. Note: there are trace elements of satire and irony present in this comment.
rogerkirkness 2mo ago
I think this is accurate and a reflection of the pathological insecurity that leads someone to want to start a startup.
sudo_cowsay 2mo ago
This is what Stanford kids do. Read "How to Rule the World: An Education in Power at Stanford University" by the theo guy.
- rootsudo 2mo ago
  Great suggestion. Thank you.
  - sudo_cowsay 2mo ago
    It's a really good book. Would recommend to everyone.
bilekas 2mo ago
> 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?
- bogzz 2mo ago
  The SpaceX IPO is perhaps the latest and most damning outcome of that gutting.
  - bilekas 2mo ago
    Seems the current SEC head is a moron. https://finance.yahoo.com/markets/article/sec-chair-defends-proposal-to-allow-companies-to-report-earnings-only-twice-a-year-203339554.html https://finance.yahoo.com/markets/article/sec-chair-defends-...
    - bogzz 2mo ago
      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.
      - a34729t 2mo ago
        I mean, maybe a disinterested moron is better for some things? Would be great if companies only had to report once a year.
        donavanm 2mo ago
        > Would be great if companies only had to report once a year. Why and how would it be in the public or shareholder interest? Im unaware if any public market where similar reductions in reporting led to significant, positive, outcomes. FTSE is the common example. They had a similar “reform” circa ‘14 and FTSE companies continue to generally under perform while the LSE continues to lose listings.
woadwarrior01 2mo ago
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)_/¯
api 2mo ago
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.
iamnothere 2mo ago
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.
Kassandraripley 2mo ago
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.
jeffreyrogers 2mo ago
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.
tonyrice 2mo ago
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.
DonHopkins 2mo ago
And then there was DEN (Digital Entertainment Network), as immortalized in this classic documentary originally produced and published by Fucked Company: https://www.youtube.com/watch?v=W41Ttr73TqU https://www.youtube.com/watch?v=W41Ttr73TqU Digital Entertainment Network https://en.wikipedia.org/wiki/Digital_Entertainment_Network https://en.wikipedia.org/wiki/Digital_Entertainment_Network Brock Pierce and his Chestahedron, Unicorn Wedding, MMPORG Currency Scams, Crypto Scams, Presidential Campaign, Steve Bannon Collaboration, and Deep Jeffrey Epstein Relationship: https://en.wikipedia.org/wiki/Brock_Pierce https://en.wikipedia.org/wiki/Brock_Pierce #BrockPierce from @AnOpenSecret on #LastWeekTonight with John Oliver https://www.youtube.com/watch?v=4TAnAYa8gas https://www.youtube.com/watch?v=4TAnAYa8gas #AnOpenSecret #ChadsWorld produced by DIGITAL ENTERTAINMENT #AnOpenSecret https://www.youtube.com/watch?v=ZkoH7sqJOm8 https://www.youtube.com/watch?v=ZkoH7sqJOm8 The Decline and Fall of an Ultra Rich Online Gaming Empire https://www.wired.com/2008/11/ff-ige/ https://www.wired.com/2008/11/ff-ige/ Brock Pierce's Relationship With Jeffrey Epstein Went Deeper Than Anyone Knew https://www.yahoo.com/news/articles/brock-pierces-relationship-jeffrey-epstein-221558638.html https://www.yahoo.com/news/articles/brock-pierces-relationsh...
ornornor 2mo ago
There two types of SV founders: those committing fraud and those who haven’t been caught. It’s an arms race.
kingkandu 2mo ago
In Silicon Valley, every acquihire that zeros out common stock while giving lumpsums + golden handcuffs to the founders is fraud where the victims are employees without legal protections. Happens everyday. YC was doing some lip service about addressing this like 10 years ago and never did shit because failed founders and employees are essential fuel for the machine.

198 points by iamnothere 2mo ago

deleted 2mo ago

[deleted]

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

hn_throwaway_99 2mo ago
> 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.
- dd8601fn 2mo ago
  Seems like your “increasingly difficult” part is kinda what they meant.
- firasd 2mo ago
  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
  - stanleykm 2mo ago
    The “Active” part of “Monthly Active Users” can mean an awful lot of things
    - a34729t 2mo ago
      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!??!
  - hansvm 2mo ago
    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.
- lumost 2mo ago
  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.
  - zbentley 2mo ago
    > 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.
- jdw64 2mo ago
  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.
abixb 2mo ago
>"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.
Zigurd 2mo ago
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.
- umpalumpaaa 2mo ago
  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
  - Zigurd 2mo ago
    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?
    - akiselev 2mo ago
      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.
giwook 2mo ago
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!"
7373737373 2mo ago
The oh so celebrated "Fake it till you make it" https://youtube.com/shorts/VpyLcfDsmNg https://youtube.com/shorts/VpyLcfDsmNg
mindtricks 2mo ago
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.
- pclmulqdq 2mo ago
  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.
pvtmert 2mo ago
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)

imadierich 2mo ago

Business as usual for the west. Talk about every other countries ethics while being the number one thief through narrative capture

jdw64 2mo ago

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.

neya 2mo ago

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.

firasd 2mo ago
Seems they use the nickname 'ScaleX' to discuss Theranos

aliasxneo 2mo ago

“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.

sjsdaiuasgdia 2mo ago
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!
- aliasxneo 2mo ago
  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.
  - sjsdaiuasgdia 2mo ago
    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".

UltraSane 2mo ago

façading has made Elon Musk very rich.

rurban 2mo ago
He has at least some incredibly good products

doodlebugging 2mo ago

"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.

AndrewKemendo 2mo ago

If this was applied to all of commercial organizations equivalently, the entirety of our society would probably grind to a halt

RetroTechie 2mo ago
Absolutely not. Silicon Valley powers its own unique type of reality distortion field.
- AndrewKemendo 2mo ago
  Have you ever bought a car near a military base? How about getting a check cashed or a payday loan? Furniture financing is almost 100% a scam Pharma pricing?

mikelgan 2mo ago

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.

nlpnerd 2mo ago

Fine line between articulating a vision well or marketing vs just lying.

27183 2mo ago

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.

iamnothere 2mo ago
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.
- ArcHound 2mo ago
  I wonder. Did we get ZIRP because we had so many profitable ideas back in the day or were those ideas only viable because of ZIRP? Meaning roughly: these tech startups guys are regularly pumping out multi-million companies and all they need is two college dropouts with laptops and an initial investment. So if I see two college dropouts I should give them money, right?
  - iamnothere 2mo ago
    We got ZIRP because Western governments decided to play “kick the can” after 2008, and most lowered rates as close to zero as they could get away with while engaging in quantitative easing. This created an environment where lending was very cheap, effectively “free money”. IMHO this along with the contemporaneous smartphone/internet services boom is what lead to the previous environment, where you could afford to take on many failures as long as you had a few unicorns. Now that the industry is mature and funds are tighter, this approach doesn’t make sense anymore.

sohrob 2mo ago

"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

timacles 2mo ago
This is literally the American way. Everyone does this at every level, from Execs down to middle managers, for every possible metric.
- ArcHound 2mo ago
  The issue is that Russians have the patent on this method (see e.g. the Potemkin village). The Americans were seen as the god-honest people speaking the uncomfortable truth to people in power, supported by the 2A. Note: there are trace elements of satire and irony present in this comment.

rogerkirkness 2mo ago

I think this is accurate and a reflection of the pathological insecurity that leads someone to want to start a startup.

sudo_cowsay 2mo ago

This is what Stanford kids do. Read "How to Rule the World: An Education in Power at Stanford University" by the theo guy.

rootsudo 2mo ago
Great suggestion. Thank you.
- sudo_cowsay 2mo ago
  It's a really good book. Would recommend to everyone.

bilekas 2mo ago

> 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?

bogzz 2mo ago
The SpaceX IPO is perhaps the latest and most damning outcome of that gutting.
- bilekas 2mo ago
  Seems the current SEC head is a moron. https://finance.yahoo.com/markets/article/sec-chair-defends-proposal-to-allow-companies-to-report-earnings-only-twice-a-year-203339554.html https://finance.yahoo.com/markets/article/sec-chair-defends-...
  - bogzz 2mo ago
    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.
    - a34729t 2mo ago
      I mean, maybe a disinterested moron is better for some things? Would be great if companies only had to report once a year.
      - donavanm 2mo ago
        > Would be great if companies only had to report once a year. Why and how would it be in the public or shareholder interest? Im unaware if any public market where similar reductions in reporting led to significant, positive, outcomes. FTSE is the common example. They had a similar “reform” circa ‘14 and FTSE companies continue to generally under perform while the LSE continues to lose listings.

woadwarrior01 2mo ago

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)_/¯

api 2mo ago

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.

iamnothere 2mo ago

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.

Kassandraripley 2mo ago

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.

jeffreyrogers 2mo ago

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.

tonyrice 2mo ago

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.

DonHopkins 2mo ago

And then there was DEN (Digital Entertainment Network), as immortalized in this classic documentary originally produced and published by Fucked Company: https://www.youtube.com/watch?v=W41Ttr73TqU https://www.youtube.com/watch?v=W41Ttr73TqU Digital Entertainment Network https://en.wikipedia.org/wiki/Digital_Entertainment_Network https://en.wikipedia.org/wiki/Digital_Entertainment_Network Brock Pierce and his Chestahedron, Unicorn Wedding, MMPORG Currency Scams, Crypto Scams, Presidential Campaign, Steve Bannon Collaboration, and Deep Jeffrey Epstein Relationship: https://en.wikipedia.org/wiki/Brock_Pierce https://en.wikipedia.org/wiki/Brock_Pierce #BrockPierce from @AnOpenSecret on #LastWeekTonight with John Oliver https://www.youtube.com/watch?v=4TAnAYa8gas https://www.youtube.com/watch?v=4TAnAYa8gas #AnOpenSecret #ChadsWorld produced by DIGITAL ENTERTAINMENT #AnOpenSecret https://www.youtube.com/watch?v=ZkoH7sqJOm8 https://www.youtube.com/watch?v=ZkoH7sqJOm8 The Decline and Fall of an Ultra Rich Online Gaming Empire https://www.wired.com/2008/11/ff-ige/ https://www.wired.com/2008/11/ff-ige/ Brock Pierce's Relationship With Jeffrey Epstein Went Deeper Than Anyone Knew https://www.yahoo.com/news/articles/brock-pierces-relationship-jeffrey-epstein-221558638.html https://www.yahoo.com/news/articles/brock-pierces-relationsh...

ornornor 2mo ago

There two types of SV founders: those committing fraud and those who haven’t been caught. It’s an arms race.

kingkandu 2mo ago

In Silicon Valley, every acquihire that zeros out common stock while giving lumpsums + golden handcuffs to the founders is fraud where the victims are employees without legal protections. Happens everyday. YC was doing some lip service about addressing this like 10 years ago and never did shit because failed founders and employees are essential fuel for the machine.