SPEAKER_00: All right, everybody, welcome to Tuesday. We have a great show for you. I was going to do a quick news hit and then put an interview on the back of this, but the two news stories were so important that I think we need to, uh, you know, double click on them. The first is a couple of hours after we spoke about the Andreessen Horowitz founders, uh, Ben Horowitz and Mark Andreessen speaking with Adam Neumann at this Saudi Arabia, uh, uh,

SPEAKER_01: conference for startups in Miami, the Saudi wealth fund disclosed the VC firms that they were LPs in an interesting public relations maneuver, and, uh, we'll talk about who's on the list. Not that that matters. It's basically who's who, but I'll break down how we as Silicon Valley should think

SPEAKER_00: about taking money from countries that are authoritarian, whether it's, uh, Russia, which invested a lot of money in us companies during the last cycle, the Facebook cycle, famously China and us investing in China and China investing in us, as well as, uh, countries in the middle east. And we'll break down why firms here in the United States are embracing the middle east and why the middle east is embracing venture capital and startups. This is a delicate dance. And I'm going to talk about all the topics that other venture capitalists won't talk about. They're not going to talk about these human rights issues. They're not going to talk about engagement versus boycotting certain markets, but I'm going to talk about it here today on this week in startups. And then, uh, a founder of a company called Frank, which was bought by JP Morgan.

SPEAKER_05: Chase for $175 million has been, uh, charged with four counts of fraud by the SEC.

SPEAKER_00: And, uh, they found out about this because she allegedly created 4 million fake user accounts and diligence. And I'm going to talk about entrepreneurship and when it's okay to boast about your success, to grade, uh, crazy targets. And when it's not okay to bend the truth, it's a crazy story. Both are critically important stories for founders.

SPEAKER_06: And so stick with us. It's going to be a great show.

SPEAKER_08: This week in startups is brought to you by masterclass.

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SPEAKER_01: the first four weeks today, uh, Saudi Arabia, the kingdom has revealed which VC firms it's investing in.

David Friedberg: So this is new information on their website. They just started to put this out.

SPEAKER_00: Normally LPs, limited partners, uh, and sovereign wealth firms. They don't trumpet who their LP, uh, who their LP and who they're backing in terms of venture funds. This is something that is she held pretty close to the vest. There's no reason to share it unless it was, uh, for public relations. And obviously that's what's happening here. So Saudi Arabia, um, has put out the names of all of their venture funds on their website. We'll put a link to that list of investments they've made in companies and, uh, the venture funds they, they backed. And this is super interesting because this happened just a few hours after we recorded yesterday's segment, uh, on Mark Andreessen and, uh, Ben Horowitz and Adam Neumann of we work

SPEAKER_01: fame and Ben and Mark are obviously from a 16 Z, uh, they spoke at a Saudi hosted conference. Interestingly, the founder of that conference invited me to go to Saudi Arabia today.

SPEAKER_00: Um, and keynote, uh, the conference. So who knows, maybe I'll make a trip to Saudi Arabia to keynote a conference, uh, on startups there I'm, I'm open to it, talking about these issues. And I think engagement is important for all countries in the world to, and all businesses in the world. And we'll talk about engagement versus isolation or boycotts in a moment, but let's just back this up here a little bit. The Saudi, uh, public investment fund has a venture arm it's pronounced to Nobel. If I am pronouncing it correctly, S A N A B I L investments. And they started posting, uh, which VC firms, as I said, on their website, it's a who's who. So, uh, and that's not surprising sovereign wealth funds have, uh, around the world always try to invest in Silicon Valley. Why would you want to invest? Because it's a great asset class and, uh, you have a chance for market beating returns.

David Friedberg: And it can be, uh, in some people's minds, a great way to diversify a portfolio, maybe five or 10% of your portfolios in private companies, which would be private equity and

SPEAKER_00: venture capital, uh, as the two major categories there, you'd have buyout firms as well. And then obviously a public market stocks, equities, you know, like Netflix or Amazon. Um, so this is no surprise that the Saudi, uh, public investment fund would want to have access to these a 16 Z is their code to general Atlantic iconic, which was the family office for, uh, Mark Zuckerberg. And it has a venture arm inside partners, KKR, and even tech stars, uh, all have investment according to, um, this website. And so according to global SWF, that's a sovereign wealth fund tracker, middle Eastern wealth funds

David Friedberg: manage over 3 trillion in, in capital in total, uh, it was a big number. And the Saudi public investment fund manages over 620 billion by itself.

SPEAKER_00: This is a very large number, right? Most venture firms, uh, have funds between 200 million and a billion dollars. So this is a lot of money to be able to put towards venture capital. And of course, if the money comes back, it would be evergreen. And if a larger amount of money comes back, it would be, um, super evergreen, right? You'd be able to put more in, uh, $620 billion. That's enough capital cover almost every single dollar, uh, that the U S venture capitalists have raised since 2016, according to pitch books numbers. So if you look at pitch books numbers and us VCs, that's 620 billion that the Saudis are putting to work. That literally is every dollar since 2016, you know, six or seven years worth of venture capital investing. And again, important to note that that's not a gift that hopefully will return three times. Or at least two or three times the money that was invested.

David Friedberg: If you pick the right funds, it could be four or five, six times, right? So they would be able to essentially bankroll the entire U S venture capital industry very easily. Um, so let's look at this there, there, there is the, uh, the issues of should venture capitalists here in the United States be doing business with Saudi Arabia, a country that has human rights violations that are pretty, uh, abhorrent and that are out of sync with, uh, us human rights standards. And just generally speaking, Western human rights standards.

SPEAKER_00: Now the argument for engagement, we are partners with them. We buy oil from them.

David Friedberg: As, uh, people reminded me, uh, on Twitter yesterday, we sell weapons to Saudi Arabia. We have a working relationship as a country with Saudi Arabia. We have a working relationship with China. We build our iPhones there.

SPEAKER_00: So the idea that you would completely isolate, uh, versus another country, just over human rights generally doesn't happen. We do have Cuba, North Korea. We have some examples of it. Uh, but in countries that are, let's call it higher functioning. Uh, we tend to engage the United States and also, uh, European countries. In fact, Germany deepened its relationships with the authoritarian country, Russia, which has caused absolute chaos on that continent, right? If they had not been so dependent on Russian oil, perhaps we would have seen, uh, different outcomes with Ukraine and the invasion, uh, that Putin did.

SPEAKER_31: Maybe not. Uh, these are very complex systems.

SPEAKER_33: Some obvious red flags. When a founder is really combative and defensive about their idea.

SPEAKER_34: Again, there's a fine line between confidence and self-assuredness and defensiveness. And it's important because you want the former, you don't want the latter because it's an indication of how the founder is going to be once we actually start working together.

SPEAKER_35: That was Reddit co-founder and friend of the podcast, Alexis Ohanian.

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SPEAKER_00: Why is this happening right now? Well, Saudi Arabia is obviously on a charm offensive on a PR campaign, um, to get business in Saudi Arabia that is outside of oil. They want to transform their economy and they are evolving in terms of, um, personal freedoms and human rights in the country. Yeah. As I mentioned on the show yesterday, they are now allowing movies in Saudi. They, they never had movie theaters there. It was not allowed. And so we're seeing changes in the, the middle East region when it comes to human rights, when it comes to LGBTQ rights, when it comes to personal freedoms, what you can read and perhaps even, um, freedom of expression, although that is a highly charged issue. So let's look at numbers. Why are venture capitalists, uh, flocking to the middle East right now? And I can tell you a large amount of, uh, commerce is occurring now between the middle East and the West that is happening in the media industry, the movie industry it's happening

David Friedberg: also in venture capital, private equity buyouts it's across the board.

SPEAKER_00: And this is because, um, according to pitch book again, uh, which is, uh, a database of venture capital data. It's considered one of the best.

SPEAKER_01: Their Q4 us venture monitor saw a record high in total capital raised by us venture funds. This is 2022, the fourth quarter, but the number of funds that raised capital in 22 was down 40% from 2021 from 1270 to 769. So let's just pause here for a second.

David Friedberg: The number of venture capital firms raising money plummeted 40% from 2021, 2022. Why did that happen?

SPEAKER_00: Well, it's hard for a first time fund manager to raise money. And so the money is obviously going to the existing column blue chip, you know, people who are on their 10th fund, their seventh fund, they're going to go first. And the LPs in America, the institutions in America, endowments like college endowments, they're not, um, they don't have on, um, they don't have never ending resources to fund venture capitalists. Our pockets are deep, but they're not never ending. And so they are over indexed in venture funds in all likelihood, their venture holdings are higher as a percentage of what they want to hold. So whether it's in a college endowment, a university endowment, or a retirement fund, um, they probably want to get through this ingestion indigestion period where they've got all these markups on paper, but that TV, uh, PI to DPI hasn't happened yet. In other words, the realized returns hasn't happened yet.

David Friedberg: So total capital raise was up 6% year over year, 2021 to 2022, but the amount of funds was down 40%. Just keep that in your mind. Uh, that means all that funding and here's a chart of it was pouring into the larger funds. Okay. So if we look in 2022, 83% of all LP dollars went to us VC funds of at least 250 million. Those are average size funds or better. So again, us VC funds were 250 million or larger us fund. Let me say it one more time here. Us VC funds that were over 250 million, um, raised 83% of all the dollars in 2022 and 57% of all LP

SPEAKER_00: dollars went to funds that are at least 1 billion. Again, that's the power law. So the big checks went to the big funds. That makes sense. So just to put up a cap in this large, a large majority of LP dollars in 2022 went to institutional VC funds, not the up and comers.

David Friedberg: And it was even more drastic in 2022 than in years prior.

SPEAKER_53: Uh, and you can see the share of us VC fund value by size bucket.

David Friedberg: Uh, and it's, um, it's pretty meager. The dollars are going to the bigger funds and that's like a flight to safety. I guess, uh, you're going for reputation, total capital raise. It's my first time VC funds was down 52% last year from 21.6 billion in 2021 to 10.3 billion in 2022. It got half again. It makes sense when people were, uh, very, uh, frisky. It was a low, uh, zero interest rate environment. People started placing bets and they couldn't get into the top funds. You can't get into Sequoia. You can't get into Andreessen Horowitz. Uh, you can't get into Excel or general Atlantic. A lot of the funds we see here, planner Perkins, they're probably oversubscribed. So what do you do? You look for new fund managers and actually new fund managers could do really well because they have new energy. They're younger. Typically they have something to prove. So they're on top of their game. They might work a little harder. Now, of course, the existing legacy ones have reputation. So they get, in some cases, first shot at the top entrepreneurs and deals, uh, but both

SPEAKER_00: of these things can be true. Total number of first-time US VC funds that raise capital is down 59% from 340 in 2021 to 141. So again, the number of funds, the dollars, all of that is showing that new funds, um, uh,

SPEAKER_58: are not going to get dollars.

David Friedberg: So let's just get totally inside baseball here, the back channel I'm experiencing tons of GPs, uh, general partners are understanding that the well, um, is pause right now for us institutional investors, retirement funds, universities, they're going to take a pause.

SPEAKER_00: They're going to let the typical eight or nine quarter workout process during a recession or a correction. It typically takes nine quarters. I believe is the number I'm wearing four or five quarters into this. Let's say five quarters now, so we probably have in all likelihood three or four more quarters a year of venture capital farms working out what's going on with their portfolios.

David Friedberg: And then you can start to see growth or interest. And maybe the institutional VCs here in the United States will want to look at funds again, maybe new funds, existing funds, but they're taking a pause right now. And so all of these, uh, LPs and GPs, if they want to raise capital, they're going to

SPEAKER_00: go to the middle East and, uh, I've been there once I went to Qatar, uh, Qatar. I've heard people pronounce it both ways here in the United States, they say Qatar and in

SPEAKER_53: Qatar, they say Qatar. So somebody can correct me if I'm wrong or explain to me why they pronounce it so many different ways.

SPEAKER_00: So, uh, it's pretty obvious what's happening here, uh, institutional us LPs, the pension funds and endowments, they've paused VC investment. GPs are looking for new places. The middle East is looking for new opportunity. They see what's happening with oil. If you look at sustainable. You know, solar wind, and then even people embracing nuclear. The middle East realizes oil will, uh, decline in value over some period in time, some period of time, China's building hundreds of nuclear reactors and they're investing in solar more than any other country. The United States, Germany, everybody has woken up to this and it's going to become a very rapid, uh, conversion from oil to, at least in the modern world, in the developed countries, oil and gas is going to deprecate maybe faster than people thought. And so that's a perfect position for the Saudis who are looking to transition to build, uh, these bridges and to get startups built in their country.

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SPEAKER_00: That's M-I-R-O.com slash startups to sign up for free. So this leaves us with the issue that is on everybody's mind. And I tweeted about this. Do founders care?

David Friedberg: That's really where this will, um, this is where the rubber will meet the road. Most of the time, founders don't know who the LPs are in funds. And most of the time, founders just need to get investment to keep their startups running and growing. So they don't ask a venture fund for your LPs.

SPEAKER_62: Are there any LPs that I might not be in sync with?

SPEAKER_01: Startup founders generally don't have the luxury of caring where the money came from. And so if somebody who was Russian, um, like Yuri Milner, uh, who had money from a previous

SPEAKER_00: oligarch, and then he built up his chip stack, now he invests his own money. There was a moment in time where people were wondering, Hey, is this a good idea? Should we be taking money from Yuri Milner? He made a series of incredible bets, Facebook being the best one.

SPEAKER_01: And then he started working out of his own, uh, returns. That seemed to have worked itself out, but would founders take money from a Russian investor today with the situation in Ukraine? Probably not. That probably would have an impact on their thinking. And certainly venture funds would not be able to take money from Russia today. China, similar situation. Saudi Arabia, perhaps another situation, perhaps slightly different.

David Friedberg: Um, so the kingdom, I think, I think the kingdom has basically pulled a Trump card, uh, to basically say, Hey, we're active and here are our partners. And I asked very simple question. The kingdom has listed the venture capital firms. It's backing founders. Do you care?

SPEAKER_71: 30.8%. And this is after 4,000 votes. And I asked for founders only. So this is completely unscientific, but probably directionally correct.

David Friedberg: 51% said they do not care. So one out of two founders do not care where a venture capital firm has their backing from. They're just going to take the money. And then maybe 18% yes, 30%. So one in three founders approximately might make a decision to not take money from entries in Horowitz as, but one example, uh, on this list because of the money taken from Saudi Arabia, is this actually true when the money is actually presented, would they not take it if it's the only money available and a founder is faced with. I could take money from injuries and Horowitz and some percentage of it. I don't know, 10%, 5% comes from Saudi Arabia. And I philosophically don't agree with the human rights situation over there. And I don't want to take the money. Would they, if they had no choice, not take the money in my experience, they're going to take the money and keep their company going.

SPEAKER_71: Um, so what I would like to say is, you know, and I'm passionate about human rights. I worked at amnesty international. It is a great passion for my entire life. I literally worked at amnesty international is my dream job. Um, and I worked there when, um, I was maybe 21 years old, uh, still in college during the

SPEAKER_00: human rights tours. And I built the first database of, uh, women's human rights violations around the world. And I sat there and watch four interns, uh, on the network. I built a little four computer network building a database and I bought the database myself. Um, they basically just typed in what were manila folders and box after box of human

SPEAKER_01: rights violations that people on the ground, you know, in South America, in the middle East and other places had poured their hearts and souls into these reports of human rights

SPEAKER_00: violations, specifically against women. Um, and it impacted me deeply as a human being watching that go from just literally a room full of boxes. Imagine, you know, a giant warehouse style room with hundreds of boxes and then watching get converted into this database I built and then doing searches on that database. It impacted me deeply as a human to have to do a search for a country. Um, you know, where rape was used as a control tool of the government or. Lashings or torture or murder. And, you know, it just seemed to me that as a country here in the United States, we should aspire towards having the best human rights record in the world.

David Friedberg: And we, we fail to be sure. If you look at our justice system, it fails. If you look at, uh, the death penalty that is against the universal declaration of human rights, um, and cruel and unusual punishment that we have in our justice system where people are kept in solitary confinement for 23 hours a day.

SPEAKER_00: All of these things are horrible, right? Uh, and, and waterboarding, which we did, uh, during, uh, one of our excursions in the Middle East, we make mistakes. But I would like to think that we aspire and that all countries aspire to treat their citizens with the highest level of human rights, um, that can be attained. And I actually believe that prosperity here in the United States, the model in Silicon Valley

David Friedberg: that we touched upon is based not just on venture capital and entrepreneurship. It's those two things for sure.

SPEAKER_01: But you have another factor, which is basic personal freedoms, the autonomy.

SPEAKER_00: And the confidence a human being has here in the United States, in the West, that they can pursue their life without worrying about the government interfering. Now, again, not perfect here in the United States, the government can interfere. You could have a dirty cop.

David Friedberg: You could have a corrupt official. You could have bribery. All of those things can exist here in the United States and do, but we aspire and our

SPEAKER_00: legal system aspires to protect everybody independent of who they love, independent of their age, their ethnicity, or what they say and their personal freedoms and human rights.

David Friedberg: Times venture capital times.

SPEAKER_01: Entrepreneurship is the prosperity that we have here in the United States, but we might forget about that human rights piece because we take it for granted. It's built into our system. It's in the constitution.

SPEAKER_62: And if we, as leaders here in Silicon Valley are going to export Silicon Valley around the

SPEAKER_01: world, I want to make a simple play. Let's keep this variable in the formula intact.

SPEAKER_00: Let's keep it in mind. I'm not going to judge anybody who does business in the Middle East. I'm not going to judge people who buy oil from the Middle East. I am going to keep an open mind to, can we, through engagement, and by the way, I'm not talking my book here, because I'm sure some people are thinking, oh, you must have secured the bag. There is no bag secured here to be sure. Um, and my funds are small enough that I have the option of not raising money from the Middle East. Um, but I also wouldn't want to leave out the possibility. Of, uh, having investors from the Middle East, if they were in sync with my philosophy and I wouldn't mind making money for somebody, an institution in the Middle East that actually cared about human rights that cared, uh, and was in sync with my values. And so as we go on these excursions, whether it's Apple building phones in China or venture capitalists securing bags in the Middle East, uh, or companies launching the Middle East, obviously Uber, uh, had cars running in the Middle East and, and I'm sure many companies here in the United States have outposts

SPEAKER_01: there engagement will ultimately lead to change.

SPEAKER_00: And as hard as it is to engage when things are out of sync, specifically the murder of Jamal Khashoggi

SPEAKER_44: comes to mind, we have to think deeply as a society, do we want to have a deeper relationship

SPEAKER_01: with Saudi Arabia, a deeper relationship with China, a deeper relationship with Russia, or do we want to isolate those relationships and which one will result in less human suffering?

SPEAKER_00: It's well above my pay grade to know what will happen here. Um, and what the right decision is, I think it's a very personal decision that everybody needs to make. If Andreessen Horowitz has made the decision, they're all in on Saudi Arabia. Uh, if Tim Cook and Apple are all in on China, you know, great, they have to live with those decisions and there will be complications for them. Tim Cook has faced those complications every day.

SPEAKER_01: Um, when somebody, when there was a rash of suicides at Foxconn factories, Tim Cook had to address that publicly here in the United States. Um, and he had to then put pressure on Foxconn and then work with the Chinese government, the CCP to say, Hey, can we make the conditions here in factories better for those workers? And so then how does Tim Cook reconcile what's happening to the Uyghurs? What's happening in the factories where iPhones are built? And wanting to sell iPhones in China, which is a large portion of their revenue. Now, these are complicated issues.

SPEAKER_00: Folks, there is no simple solution. Uh, but I want to talk honestly about them here on this podcast.

SPEAKER_01: And if I do go to Riyadh, if I do speak at that conference, I would like to speak openly about these issues. And so now I'm faced with, I've been invited to the conference. Could I say what I said on this podcast in that conference? I don't know, is it safe for me to travel there? These are like serious issues.

SPEAKER_93: I've got children, et cetera. I don't want to wind up in a gulag. If I go to Saudi Arabia and I speak my mind, can I speak my mind there? Can I talk about these issues?

SPEAKER_00: If what I w w would they, would I be allowed to publish this episode and yesterday's episode in Saudi Arabia? I don't know. Somebody from Saudi Arabia, police from the kingdom. Let me know when I've stepped over the line and what's acceptable in terms of dialogue. As we start this process of integrating Silicon Valley and the kingdom and other countries in the Middle East.

David Friedberg: What, what are the rules here? What are the ground rules? Are we going to talk about it openly? Or is everybody going to pretend like you saw with Ben Horowitz and Mark Andreessen in their talk on Friday? Just going to pretend that everything's awesome. Everything's great.

SPEAKER_17: And not talk about the difficult issues.

SPEAKER_10: Which is it? I will choose to talk honestly about these issues.

SPEAKER_00: And if it means I don't get to go to Riyadh and I don't get to raise money from Saudi Arabia, I think I'll be okay. I think I'll still be wildly successful with LPs from other places. And I'm going to play the long game.

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SPEAKER_01: Let's move on to another issue here. The SEC has charged a 31-year-old startup founder with four counts of fraud for allegedly creating over 4 million fake customer accounts to pass due diligence in a $175 million acquisition by JPMorgan Chase. Of all possible buyers. The founder's name is Charlie Javis. And her startup is Frank. Frank was a consumer fintech app that helps students better navigate the student loan process. Seems like a reasonable idea. But today, the SEC charged Charlie with one count of conspiracy to commit bank and wire fraud. That's a max sentence of 30 years. And one count of wire fraud affecting a financial institution. Again, 30 years in prison. I don't know if those are current or if they would be consecutive. One count of bank fraud. It's another 30 years. And one count of securities fraud. That's 20 years.

SPEAKER_73: Again, I don't know if these are concurrent or consecutive.

SPEAKER_01: But if you were to get that sentence and it was even concurrent, Charlie's not getting out until she's in her 60s. So the world's going to look pretty different, Charlie. She started the company in 2016, 2017. And again, innocent until proven guilty, but it's not looking good.

David Friedberg: And this is the Southern District of New York, which we've talked about many times. SDNY, they do not play.

SPEAKER_43: As we've seen, she was 24 to 25 years old when she started the company. This is just tragic. I wonder who was on the board here. Who was watching the shop? Who was advising this founder?

SPEAKER_00: A topic I talk about in my interview with Satya Patel from Homebrew that's coming out in a couple days. She was featured, Charlie, on the Forbes 30 under 30 list. Hmm. I think we need to make felons under 30.

SPEAKER_100: 30 felons under 30? If she gets convicted and we can put a bunch of other people on that list.

SPEAKER_101: She raised $20 million from investors, including Apollo Global and Chegg.

SPEAKER_103: And they valued the firm at $35 million in March of 2020. In September of 2021, JPMorgan Chase acquired Frank for $175 million.

SPEAKER_01: And she netted $45 million from the sale. So she owned about 25% of the company.

SPEAKER_00: In 2022, JPMorgan sued Charlie, claiming she provided a list of over 4 million fake customers in Diligent.

SPEAKER_01: And just today, April 4th, the SEC charged her with four counts of fraud.

SPEAKER_103: According to pitch book, the board of directors had Mark Rowan from Apollo Global and Michael Eisenberg from Elfie, A-L-E-P-H, a VC firm.

SPEAKER_00: Um, I'm guessing some other internal Frank employees will get rounded up here or not. Um, but this looks really bad. And this is why we train our founders in the launch accelerator.

SPEAKER_01: When they pitch their companies, we'll have a founder off and say, here are our customers and our pipeline and, uh, who's using our product. And they'll mix that all into one sentence.

SPEAKER_00: Okay. And then you'll see 20 logos and then it's up for the VC, uh, or investor angel seed fund, uh, somebody who's going to join the company to look at those 20 logos on that page.

David Friedberg: And then say, okay, this logo here is that I see have IBM as a customer is IBM on your target list, trialing the software or a paid customer. And they say, oh, they're trialing it. Okay. Next one. Next one. And we say, okay, founders, please. You can put here are paying customers on one slide, but it's two, two brands. Here are our trials and it's 10 brands, 10 logos. And then here's who we have in our pipeline. These are our targets.

SPEAKER_00: And then people could say, okay, pipeline means nothing. Trialing the software means something, but not all that much. And paid means a heck of a lot. Uh, so let's start with paid and you can basically, as an investor, throw those other two categories away because they mean nothing like letters of nothing. I'm sorry, letters of intent. We, we have an internal term. We call them letters of nothing. L O Ns letters of intent are what entrepreneurs who don't have the chutzpah to charge for their product do instead of being a product that people will actually pay for.

SPEAKER_01: Do not get caught up in letters of nothing and do not ever bend the truth because it could break you and your company. The allegations are just nuts. She's been sued twice by JP Morgan. And now the sec, it's the same allegations at some point of 2021, two major banks expressed interest in acquiring Frank. Frank CEO, Charlie, uh, told JP Morgan that it had 4 million users in diligence. They found, uh, they asked for a list to verify.

SPEAKER_24: Uh, initially they refuse saying she could not share customer list due to privacy concerns. That's a red flag.

SPEAKER_01: Um, major red flag, when a founder, and I've had this happen, will not share a contract, will not share a customer list, will not give you a customer reference, red flag, red flag, major, major red flag.

David Friedberg: Especially if you're putting hundreds of thousands or millions of dollars into a company, it makes absolutely no sense.

SPEAKER_00: There's so many ways to do this, to avoid privacy concerns. You could just say, Hey, here is, um, we've got our entire 4 million customer list. We're going to randomly sample, give us 10 numbers, give us a hundred numbers from one to 4 million. And we will take this list. We'll have our attorneys, a CPA firm or ourselves, pull those hundred names. We pull those hundred names. We then asked, we put their first name last initial, or just their first name. And then we put all the other account information that's not personally identifiable. And then during diligence, the person could email those folks or just look at their account activity and say of the hundred random, how many logged in this today, how many logged in this week, this month, how much money do they have on deposit, et cetera.

SPEAKER_01: And just do some basic math on the random cohort, right? It's a random cohort. Okay.

SPEAKER_24: So now, according to the lawsuit, Charlie and the chief growth officer asked the head of engineering to create a fake customer list, but the engineer refused.

SPEAKER_00: And he, you know, probably said to himself, like, do I want to go to jail, which apparently Charlie and her chief growth officer never asked themselves.

SPEAKER_103: So Charlie approached, quote, a data science professor at a New York city area college to help.

SPEAKER_110: Hmm.

SPEAKER_01: Okay. Interesting to see who that is using data from existing accounts. The data scientists created a list of 4.2 million fake accounts.

SPEAKER_00: I'm guessing they told us that data scientists, they were doing some data science experiment where they just needed 4 million.

SPEAKER_98: Dummy accounts to run some tests on these included fake first and last names, addresses, and dates of birth. I mean, this is crazy. They paid the dines, the data science professor 18 grand for this list and a bingo, $175 million, uh, acquisition.

SPEAKER_00: So that $18,000 customer list, give them a 10,000 X markup kind of reminds me of some investments.

SPEAKER_103: I've made, except in those cases, they had real taxi rides and real, uh, accounts.

SPEAKER_43: So in reality, the JP Morgan lawsuit states that Frank had fewer than 300,000 actual customers.

SPEAKER_01: Jamie diamond says the acquisition was a huge mistake, but that JP Morgan needed to keep taking risks. Obviously here's his quote, obviously when you're getting up to bat 300 times a year, you will have errors.

SPEAKER_104: And we don't want our company to be terrified of errors and do nothing. Of course not.

SPEAKER_00: But there does need to be some reckoning in the due diligence group at JP Morgan. If you're gonna spend 175 million beans on something of shareholders, uh, with shareholders money, better do your diligence.

SPEAKER_103: Uh, and if you better understand what red flags are, let's end here with a 38 second clip of who I predict will be the next per walk and person to serve 10 years. Maybe she'll get to hang out with Sam bank run fraud and Elizabeth Holmes 38 seconds from Charlie.

SPEAKER_117: We're really excited.

SPEAKER_119: We think we have a good thing going, um, and we think families and we've seen it, we have more demand than we're able to handle. And so we're staffing up and it's wonderful to see a company grow, um, from a strong foundation. And I think when you do something that has, you know, is, is mission positive, you do end up making a business out of it. And I think it's really funny from an investor's standpoint, and this is why they see such a huge opportunity because most people will turn you down because they don't understand financial aid.

SPEAKER_120: And as an investor, they've never needed to take out financial aid for themselves or for their children.

Chamath Palihapitiya: Okay. Um, would I be able to detect this with my incredible reading skills?

SPEAKER_103: Maybe not. I would love to know what her parents did and how they raised her. I always look towards that.

SPEAKER_00: It does seem like these grifters come from a certain background, but, uh, this is a weird one because, uh, this is not the type of crime. And again, it's all alleged right now, but if it's true or some portion of it's true, this isn't what I perceive happened at Theranos where they got in over their head. And then they started breaking rules and it just got worse and worse, uh, or maybe what happened in made off where he started breaking the rules. Um, and then the cover up just became so huge that it became, you know, uncontrollable in terms of, um, in made off case, like the new investors were paying off the sins of, uh, the lack of performance from 20 years ago.

SPEAKER_105: Um, this to me seems like just outright premeditated fraud to secure the bag, 999 founders out of a hundred thousand would never do anything like this in my mind.

SPEAKER_104: But I would say a third of founders will bend the truth early in their careers. They'll be optimistic. A hundred percent of founders should be optimistic. And that's where the lesson is here for founders. There's optimism. You're allowed to be a hundred percent optimistic.

SPEAKER_00: There is setting audacious targets, perhaps even absurd targets, totally allowed. You better back them up and you might want to say, Hey, I understand this is outrageous, but I'm going to go for it.

SPEAKER_05: And then there's bending the truth, breaking the law and anything. When you start bending the truth and you start calling a user, a customer user, doesn't pay customer does you start saying somebody who's on a trial, um, has a, a contract value of 5 million. And then you start saying, Oh, the contract value of all of these people who are on trials is, you know, $50 million and you start spinning some yarn. I would check yourself and understand that investors understand full well, that three Uber rides that occurred last night from SFO to the city could quickly go grow to 30, 300 and then 3000. And that, that, you know, uh, $10 that Uber made on those 3000 rides could grow to $20 and that could be $60,000 activity. We've seen things have market pull. And we've seen exponential growth over and over and over again. Therefore you don't need to lie. All you need to do is tell us about two, three, four, five customers who are over the moon about your product. And that's all she needs to do. She should have just taken credit for the 300,000 and she should have taken the top 3000 of those studied that 1% who were obsessed with her product. And then found more of those users and converted the other 297,000 into massively passionate customers or found more of the passionate customers or tweak the product to have more appeal. And then she would not have had to make up 4 million bogus accounts.

SPEAKER_101: Allegedly. She could have just found 4 million customers out there. It's not that hard folks. If you can get to 300,000 customers. And maybe even if 10% of those were really passionate ones, you can get there. You don't need to cheat.

SPEAKER_05: The American system is set up for you to fail and then get a second shot, a third shot. So just embrace the failure and don't lie, don't bend the truth, just own the reality.

SPEAKER_101: And that's what great entrepreneurs do. Great leaders define reality and they accept reality and they make a plan to make that reality better and to exploit the reality to their success and their goals.

SPEAKER_05: That's the name of the game, except reality, and then build products and services that exploit the reality that exists today. Oh, it's hard to get a cab in Brooklyn. Oh, spending $25,000 on trading fees means I'm not going to trade shares. I'm not going to trade one share of Uber or Airbnb. Great. What if we figured out a way to make trading free?

SPEAKER_93: Well, I can't find a place to go do meditation near me because I live in the suburbs and there's no meditation.

SPEAKER_05: I don't want to drive two hours to meditation because that's going to give me more agita and stress to drive two hours back and forth from meditation. Oh, I have this calm app is helping me with my equanimity. Just accept reality and then, you know, exploit that reality to your own personal success and success of your company. That's allowed. It's allowed for you to delight customers. It's allowed for you to make a better product. It's allowed for you to study customers. It's allowed for you to use marketing techniques to get people to try your product. It's allowed for you to be bombastic and proud and audacious in your goals so that people believe you and invest in you and join your company. But you're not allowed to lie. You're not allowed to cheat.

SPEAKER_103: And if you do, Sam Bankrun Fraud, Elizabeth Holmes, and now Charlie, perhaps.

SPEAKER_104: And again, innocent until proven guilty. But when the SDNY goes after you, I think they only pursue cases when they're 99%.

SPEAKER_43: I'll just say this very seriously. SDNY has a lot of cases they can go after.

SPEAKER_103: If this is an SDNY case, which I believe it is, they are 99.x% sure they're going to win the case. They would not bring it unless they had the person dead to rights.

SPEAKER_99: In what I've heard, listening to Breet Bharara's podcast. Stay tuned, Breet.

SPEAKER_00: All right. And according to Forbes, her father worked at a hedge fund. Mother's a life coach and a former teacher. Brother's chief digital officer at Popeyes. And she was admitted to the Wharton School at Penn. And she graduated it in three years. Studied finance and law. Fate loves irony, does it not? I always see this.

SPEAKER_44: And I hate to be cynical. But what is it with Ivy League kids from privilege committing these crimes?

SPEAKER_104: Is there some entitlement? Or they want to impress their mommy and daddies with their success so they bend the rules? Or did they see mommy and daddy break the rules?

SPEAKER_44: Somebody who's a psychologist, or if there's a study on this of what crimes, like white collar crime seems to have as a precursor, an Ivy League degree and some really successful parents.

SPEAKER_00: Hmm. I guess we have to study that. I was going to be a forensic. Uh, I was going to be a forensic psychologist.

SPEAKER_103: I was going to go to John Jay and take criminal psychology and then go into the FBI and be a profiler or an agent. That was kind of my dream job when I was at Fordham University. Hmm.

SPEAKER_04: Maybe I, maybe I could catch more of these white collar crimes. Elizabeth Holmes, SBF. And now Charlie. I think they all had, uh, Ivy League pedigrees. Hmm. Hmm. Hmm.

SPEAKER_103: Now, Adam Newman. That's how you know he's innocent, right? He came from, did he come from nothing? He just grew up on a commune, right? Like, I think shout out to Adam Newman. He's just a hustler. The kid didn't even wear shoes until he was 16. I think Adam Newman is just a hustler.

SPEAKER_53: And I think it's easy because he's peculiar to throw rocks at him. And because he does weird stuff, um, and runs a company like it's a party. Interesting.

SPEAKER_02: All right, everybody. We'll see you next time on This Week in Startups. We'll see you next time on This Week in Startups.