All Here founder's arrest shows it's easy for startups to scam investors

https://www.axios.com/2024/11/27/allhere-founder-arrest-startups-scam-investors#

by uladzislau • 2 years ago

53 56 2 years ago

axios.com

Mick_Doohan• 2 years ago

It’s a regular Tuesday. Just look at how “Spac King” Chamath Palihapitiya scammed millions out of investors.

hn_throwaway_993• 2 years ago

I still think most VCs will feel that super thorough verification isn't necessary, and in retrospect I agree:

1. Cases like the All Here example are kinda baffling to me. It's like the founder jumped out of a window without a parachute and was like "This is fine! I'll learn to fly before I hit the ground." I think in cases that are as egregious as this, the fraud is eventually discovered, if only because at some point it has to become blatantly obvious.

2. If by some miracle the fraudulent founder does manage to "make it" before their "fake it" is discovered, well then, honestly good for them I guess. VCs tend not to get too angry if you make them a ton of money.

Point being, in cases like this All Here one, the "Frank" company fraud by CEO Charlie Javice, Theranos, etc. were all examples that were pretty much guaranteed to be discovered at some point (and pretty soon at that), because none of their tech had any hope of working in the first place.

As an analogy, it's also pretty easy to write bad checks, but they're also likely to be discovered very quickly, with the check scammer going to jail, so banks just consider it the cost of doing business.

blackeyeblitzar• 2 years ago

It's like the founder jumped out of a window without a parachute and was like "This is fine! I'll learn to fly before I hit the ground." I think in cases that are as egregious as this, the fraud is eventually discovered, if only because at some point it has to become blatantly obvious.

I think their goal was to use false figures to attract investment that would lead to real revenue that would eventually cover up the alleged fraud. If they managed to build a good product and find market fit and revenue with their Series A funds, maybe it would have worked. What’s weird though is that all these investors didn’t do basic diligence to confirm the money flows that were claimed. It’s a bit different from the Theranos fraud, where the fraud was around the effectiveness of a highly complicated and secretive product rather than revenues that are easy to confirm with bank statements.

throwup2384• 2 years ago

It’s a bit different from the Theranos fraud, where the fraud was around the effectiveness of a highly complicated and secretive product rather than revenues that are easy to confirm with bank statements.

Anyone who did the bare minimum of due diligence found out from experts that blood from finger pricks is not usable for the kind of diagnostics they were proposing, which is why no qualified biotech VC invested in them. It was all dumb money like Ruper Murdoch and tech investors Tim Draper/DFJ who have no idea what they're doing in biotech.

Investors didn't even need to look in the books or research, it prima facie was not going to work.

nikanj2• 2 years ago

It's usually "This is fine! We'll use $BUZZWORD to fly before I hit the ground."

I still remember the countless startups where the business model was basically "You give us money by the boatload, and we promise to use the word blockchain in every presentation"

DonHopkins4• 2 years ago

That makes sense, because they're just laundering the money, by definition.

khuey• 2 years ago

2. If by some miracle the fraudulent founder does manage to "make it" before their "fake it" is discovered, well then, honestly good for them I guess. VCs tend not to get too angry if you make them a ton of money.

For obvious reasons relating to perverse incentives "making it after faking it" doesn't get you out of legal jeopardy. None of Martin Shkreli's investors ultimately lost money but he still went to prison and had enormous fines imposed.

freddealmeida• 2 years ago

Most solid firms, like my own, have strong financial controls, a CFO, and a board with strong oversight. Absolutely never had a problem.

If you are going to build a startup, build a board, get your finances in control and very transparent to investors.

Fraud will never be gone but you can ensure your firm will never be accused of it.

JumpCrisscross13• 2 years ago

Most solid firms, like my own, have strong financial controls, a CFO, and a board with strong oversight

One of my takeaways from the chaos surrounding SVB’s collapse is that Silicon Valley is starved of CFOs. Part of this is due to the anti-MBA high horse that was in vogue in tech post financial crisis. Part, frankly, is VCs wanting to be the only financial brains in the house. (Guess who loves promoting the MBA myths? Despite being staffed by MBAs?)

conductr• 2 years ago

As a CFO, VCs definitely don’t like other financial brains and they’re generally miserable to work with has been my experience

Their problem is they want the financials to track to their financial models despite their entire investment thesis being an opportunistic wonderland of assumptions. Otherwise, it wouldn’t have met someone’s imaginary return threshold.

nikanj2• 2 years ago

If you have the financial aptitude to become a CFO, would you rather eat ramen in a flophouse or make proper money in an investment bank?

DonHopkins4• 2 years ago

It requires a great MBA to successfully perpetrate fraud! ;)

spondylosaurus• 2 years ago

The startup I worked at whose CEO got arrested for fraud also happens to be a startup that didn't have a CFO. (Or, as he explained it at the time, whose CEO was also the CFO... but c'mon, lol.)

JumpCrisscross13• 2 years ago

“usually via small wire transfers via PayPal or Zelle”

Come on Axios…

syspec• 2 years ago

What's? What's wrong with it?

JumpCrisscross13• 2 years ago

What's? What's wrong with it?

While you technically can send and receive wires from your PayPal account, most transfers on PayPal are done via PayPal. Zelle, meanwhile, doesn't support wires--it's a totally separate payment rail. "Wires" in America means Fedwire, a specific rail. (Globally, it means a widely-used real-time gross-settlement funds-transfer rail.)

"Wire transfer via...Zelle" is nonsense.

bradley13• 2 years ago

Somewhat related: I find the concept of "pivoting" pretty ridiculous: "Here's our start-up, our idea doesn't work. Let's do something completely different before our funding runs out!"

seizethecheese• 2 years ago

PayPal famously raised money then immediately pivoted. It sometimes works out.

two_handfuls• 2 years ago

I mean, would you rather continue doing what isn't working?

Most pivots are to a related idea though.

paxys2• 2 years ago

Early stage investors are funding founders, not products. It's very rare for an idea to work out exactly how it was intended from the get go. I'd wager most/all successful companies are a product of multiple pivots in their early years.

ulfw• 2 years ago

Which is complete bullshit considering it's impossible to get funding unless you have a team, a product and already traction/customers/sales nowadays. But sure. If you're super well connected and your buddies fund you...

JumpCrisscross13• 2 years ago

I find the concept of "pivoting" pretty ridiculous

I find special relativity ridiculous, that doesn’t mean it doesn’t work.

habosa• 2 years ago

The Forbes 30 under 30 to prison pipeline continues its excellent run.

mrandish2• 2 years ago

Maybe it should be called the "Forbes 30 under 30 doing 30"?

DonHopkins4• 2 years ago

Now that he's older and wiser, Jack Weinberg should revise his famous quote to:

"Don't trust anyone on 30 under 30."

https://en.wikipedia.org/wiki/Jack_Weinberg#%22Don't_trust_a...

paxys2• 2 years ago

This is pretty much a guarantee when VC funding is driven by FOMO rather than fundamentals. If anything I'm surprised by how such few founders end up in handcuffs.

testfoobar• 2 years ago

At what level of $$ investment do angel investors, Silicon Valley VCs and/or boards expect professional, periodic audits?

This is what I personally want to see in non profit board meetings: cash flow, headcount, categorized expenses and a balance sheet. I also want to see a copy of a bank account statement attached to the board docs validating the cash flow numbers. This is not a proper audit - but this builds a paper trail where the CEO is snap shotting an org's financial health in writing at a period in time.

What does a VC who has invested $8M expect in terms of audit?

_gmax0• 2 years ago

Ostensibly this roostful homecoming is a result of increasing capital costs.

max_3• 2 years ago

The truth about raising VC money is that it's mostly about deception.

If you don't deceive, other people who engage in deception will be funded instead of you.

Alot of VCs actually admit to this indirectly.

They say for example the role of a pitch deck is to "Get the VC excited".

If you talk about real, boring numbers? (early stage businesses must have boring numbers or they are actually not "early stage". How can you make millions of dollars and continue to call yourself "early stage") you will be ignored.

It's about like dating. If a woman wants to get attention from men.

A rational man would look for features like trust worthiness, commitment, love, he cooking skills etc.

But women know that to get most men's attention it's usually about having a fake silicone butt, fake exposed cleavages, fake pouty lips, fake hair and make up.

Deceptive women definitely get more attention from men than natural undeceptive women.

We shouldn't be surprised that in VC investors are biased to fall for deception from fraudulent start-up founders.

Instead of real founders that don't have Juicy metrics.

JumpCrisscross13• 2 years ago

Alot of VCs actually admit to this indirectly

Did they say this at a secret VC party? Or did you hear someone praising chutzpah and hear that as fraud?

max_3• 2 years ago

They said it on a podcast.

I have even read documents on blogs by law firms close to VCs & tech firms that describe pitch decks as a "hook" — as in like the bait used to catch a fish.

Joel_Mckay• 2 years ago

I'm shocked... =3

https://www.youtube.com/watch?v=N4vIBijzg4w

ChrisArchitect• 2 years ago

[dupe] https://news.ycombinator.com/item?id=42284092

1vuio0pswjnm7• 2 years ago

No Javascript;

https://web.archive.org/web/20241127233849if_/https://www.ax...

kazinator• 2 years ago

All Here founder getting away with it would more convincingly show that it's easy.

All Here founder's arrest shows it's easy for startups to scam investors

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