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According to the author-entrepreneur, corner-cutting, fudging, faking it, and white lies are extremely prevalent among startups

The author Jakub Kostecki is building StartupFactCheck.com, a front-end due diligence engine for early-stage investing.

Five years ago, Naval Ravikant of AngelList said, “Spectacular fraud will occur in angel investing.” He also added, “Entrepreneurs will exploit investors.”

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

Five years have passed and fraud is still being seen as the ‘F’ word in the industry. Recently, when I used the provocative term “startups lie” when I was developing the business, I heard in response: “You won’t get far using the word lie.”

And then, I came to know 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.

La la la la lies!

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.

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— a CEO who put the name of his former CTO in all of the materials he put out (for fundraising, hiring and PR purposes) had not worked with him/her for two and half years.

— a startup which said it had 10 customers actually had just two paying customers. The others were just users or non-paying customers.

— a founding CEO hired a business guy to go through one of the top three accelerator programmes 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 three 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 Y Combinator (early 2015). About 20 per cent 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 said they had a product that would be ready to support 10,000 users in two weeks. What they had were a few active wireframes. They needed six months at a market cost of US$100,000 to build a working product. That will be funded out of the US$250,000 investors were going to put in for user acquisition.

— a startup that was raising money listed person XYZ as CTO 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 the search engine giant through a subcontractor five years ago. The project lasted just six hours.

— a founder met an angel investor and told him about an idea (he was loosely kicking around). When he saw the angel’s eyes light up he went home, registered a domain name, did AngelList, and 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 US$275,000 two weeks later.

Ghost ships and reality check

We all keep running around saying “most startups fail.” But where did those figures come from?

How did we arrive at ‘nine out of 10 startups fail?’ I’m sure when we deep dive into these numbers (and we’re planning to do just that), we’ll find out that a lot of those nine 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 that 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 website, 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. It is just to see whether or not the information put out into the world is factually correct.

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We believe that what the Romans said still rings true, “Paper endures all.” It’s easy to write something, especially online.

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 clamour 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 startups as advances or loans (because they’re nor an accredited investor).

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

I’ll leave you with this slide from Ravikant to draw your conclusions from.

This article has been republished from Medium. 

The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email at writers[at]e27[dot]co

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