This Week in Startups - Saudi Arabia discloses LP positions & SEC charges Frank founder with fraud | E1713

Episode Date: April 4, 2023

First up, Jason touches on Saudi Arabia’s Public Investment Fund disclosing which VC firms it has made LP investments in (2:48), which leads to him pondering the human rights issues and if founders care where their money comes from (18:52). Jason caps off the show by breaking down the SEC’s charges against Frank founder Charlie Javice for allegedly closing a $175M acquisition based on over 4M fake user accounts (30:18). (0:00) Jason kicks off today’s show (2:48) Saudi Arabia discloses LP positions (8:24) MasterClass - Get 15% off an annual membership at https://masterclass.com/startups (9:52) Why is Saudi Arabia diversifying? (17:21) Miro - Sign up for a free account at https://miro.com/startups (18:52) Founders’ thoughts on where their funding comes from (21:26) Jason’s passion for human rights (29:01) Lemon.io - Get 15% off your first 4 weeks of developer time at https://Lemon.io/twist  (30:18) Frank founder charged with fraud (33:03) Be clear about your customers (34:35) Allegations against Charlie Javice (47:00) Lessons for founders  (44:56) Ivy League convicts LINKS: Sanabil Investments LP Disclosure document https://www.sanabil.com/en/our-partners/ FOLLOW Jason: https://linktr.ee/calacanis Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1 FOUNDERS! Subscribe to the Founder University podcast: https://podcasts.apple.com/au/podcast/founder-university/id1648407190

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, you know, double click on them. The first is a couple of hours after we spoke about the Andresen Horowitz founders, Ben Horowitz and Mark Andreessen speaking with Adam Newman at this Saudi Arabia conference for startups in Miami, the Saudi wealth fund disclosed the VC firms that they were LPs in, an interesting

public relations maneuver. And 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 about taking money from countries that are authoritarian, whether it's Russia, which invested a lot of money in U.S. companies during the last cycle, the Facebook cycle famously, China and us investing in China and China investing in us, as well as 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 weekend startups. And then a founder of a company called Frank, which was bought by JP Morrill, Morgan Chase for $175 million has been charged with four counts of fraud by the SEC. And they found out about this because she allegedly created four 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 create crazy targets and when it's not okay to bend the truth. It's a crazy story. both are critically important stories for founders. So stick with us. It's going to be a great show. This weekend startups is brought to you by Masterclass. Learn from the world's best minds.

Anytime, anywhere, and at your own pace. Get 15% off an annual membership to Masterclass at masterclass. com slash startups. Muro helps take ideas from in your head to out there in the world with its ability to do that. democratized collaboration and input. Sign up for free at mero.com slash startups and lemon. com.

Need to speed up your product development without draining your budget? Hire vetted engineers from Europe at lemon.io. Go to lemon.com slash twist to get 15% off for the first four weeks. Today, Saudi Arabia, the kingdom, has revealed which VC firms it's investing. in. So this is new information on their website. They just started to put this out. Normally, LPs, limited partners and sovereign wealth firms, they don't trumpet who their LPing, who they're backing in terms of venture funds. This is something that is usually held pretty close to the vest. There's no reason to share it unless it was for public relations. And obviously, that's what's

happening here. So Saudi Arabia 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 the venture funds they backed. And this is super interesting because this happened just a few hours after we recorded yesterday's segment on Mark Andreessen and Ben Horowitz and Adam Newman of WeWork fame. and Ben and Mark are obviously from A16Z. They spoke at a Saudi-hosted conference. Interestingly, the founder of that conference invited me to go to Saudi Arabia today and keynote the conference.

So who knows, maybe I'll make a trip to Saudi Arabia to keynote a conference on startups there. 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 public investment fund has a venture arm. It's pronounced to Nabil, if I am pronouncing it correctly, S-A-N-A-B-I-L investments. And they started posting which VC firms, as I said, on their website. It's a who's who. So, and that's not surprising. Sovereign, sovereign well,

funds have around the world always try to invest in Silicon Valley. Why would you want to invest? Because it's a great asset class and you have a chance for market beating returns and it can be in some people's minds a great way to diversify a portfolio, maybe five or 10 percent of your portfolios in private companies, which would be private equity and venture capital 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. So this is no surprise that the Saudi public investment fund would want to have access to these.

A16Z is there, KOTU, General Atlantic, iconic, which was the family office for Mark Zuckerberg, and it has a venture arm, insight partners, KKR, and even tech stars, all have investment according to this website. And so according to global SWF, that's a sovereign wealth fund track. Middle Eastern wealth funds manage over $3 trillion in capital in total. It was a big number. And the Saudi public investment fund manages over $620 billion by itself. This is a very large number, right?

Most venture firms 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 super. evergreen, right? You'd be able to put more in. $620 billion. That's enough capital cover almost every single dollar that the U.S. venture capitalists have raised since 2016, according to pitchbooks numbers. So if you look at pitch books numbers and USVCs, 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, 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. So let's look at this. There is 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 abhorrent and that are out of sync with U.S. human rights standards and just generally speaking, Western human rights standards. Now, the argument for engagement, we are partners with

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

with Ukraine and the invasion that Putin did. Maybe not. These are very complex systems. Some obvious red flags. When a founder is really combative and defensive about their idea, 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.

That was Reddit, co-founder and friend of the podcast, Alexis O'Hanian. He just did a masterclass called Building Your Startup, and it's a must listen slash watch. If you're a business leader, you can learn so much on master class. There are amazing lessons from Bob Eiger on leadership, Chris Voss, on negotiations, and Friend of the Pod, Kim Scott, on Radical Cander. And I have a little J-Cal cameo in that one. Hey, how about Gordon Ramsey on cooking? Serena Williams on tennis or Simone Biles on gymnastics. Legends of their craft are waiting for you at Masterclass to teach you whatever you want to learn and you will get inspired because you pay just once for an unlimited masterclass subscription. It's a no-brainer.

We just had awesome insights from Alexis in just 18 seconds. Imagine how much you're going to learn in 10 minutes or even two hours. So here is your call to action. I highly recommend you check it out. Get unlimited access to every class. And as a twist listener, you get 15% off an annual membership. Go to masterclass.com slash startups now. That's masterclass.com slash startups for 15% off masterclass. But let's look a little bit about why this is happening. Why is this happening right now? Well, Saudi Arabia is obviously on a charm offensive on a PR campaign to get business in Saudi Arabia that is outside of oil. They want to transform their economy, and they are evolving in terms of personal freedoms and human rights in the country. As I mentioned on the show yesterday, they are now allowing movies in Saudi.

They never had movie theaters there. It was not allowed. And so we're seeing changes in 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 freedom of expression, although that is a highly charged issue. So let's look at numbers. Why are venture capitalists flocking to the Middle East right now? And I can tell you a large amount of commerce is occurring now between the Middle East and the West. That is happening in the media industry, the movie industry. It's happening also in venture capital, private equity buyouts. It's across the board. And this is because

according to Pitchbook again, which is a database of venture capital data. It's considered one of the best. Their Q4 U.S. Venture Monitor saw a record high in total capital raised by U.S. venture funds. This is 2022, the fourth quarter. But the number of funds that raised capital in 22 was down 40% from 2021, from 1,270 to 769. So let's just pause here for a second. The number of venture capital firms raising money plummeted 40% from 2021, 2021, 22. Why did that happen? Well, it's hard for a first-time fund manager to raise money. And so the money is obviously going to the existing,

called Blue Chip, you know, people who are on their 10th fund, their 7th fund, they're going to go first. And the LPs in America, the institutions in America, endowments like college endowments, they're not, they don't have on, 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 a college endowment, a university endowment, or a retirement

fund, they probably want to get through this ingestion, indigestion period, where they've got all these markups on paper, but that TVPI to DPI hasn't happened yet. In other words, the realized returns hasn't happened yet. 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. 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 U.S. VC funds of at least 250 million. Those are. average size funds or better. So again, U.S. VC funds were 250 million or larger.

U.S. fund, let me say it one more time here, U.S. VC funds that were over 250 million, raised 83% of all the dollars in 2022. And 57% of all LP dollars went to funds that are at least $1 billion. Again, that's the power loss. 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.

And it was even more drastic in 2022 than in years prior. And you can see the share of U.S. VC fund value by size bucket. And it's pretty meager. The dollars are going to the bigger funds. And that's like a flight to safety, I guess. You're going for reputation. Total capital raised by first time VC funds was down 52% last year from 21.6 billion. billion in 2021 to 10.3 billion in 2022. It got half. Again, it makes sense. When people were

very frisky, it was a low zero interest rate environment, people started placing bets and they couldn't get into the top funds. You can't get into Sequoie. You can't get into Indreason Horowitz. You can't get into Excel or General Atlantic. A lot of the funds we see here, Finer 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, but both of these things can be true.

Total number of first-time USVC 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. are not going to get dollars. So let's just get totally inside baseball here. The back channel I'm experiencing, tons of GPs, general partners are understanding that the well is pause right now

for U.S. institutional investors. Retirement funds, universities, they're going to take a pause. 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 and we're in four or five quarters into this. I'd say five quarters now. So we probably have in all likelihood three or four more quarters a year of venture capital firms working out

what's going on with their portfolios. 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. now. And so all of these LPs and GPs, if they want to raise capital, they're going to go to the Middle East. And I've been there once. I went to Qatar, Qatar. I've heard people pronounce it both ways. Here in the United States, they say Qatar and in Qatar. They say cutter. So somebody can correct me if I'm wrong or explain to me why they pronounce it so many different ways. So it's pretty obvious what's happening here. Institutional USLPs, 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 decline in value over some period in time, some period of time. China is 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

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 these bridges and to get startups built in their country. There is nothing like a great whiteboarding session, right? Everybody love that. Well, now you can brainstorm your ideas, collaborate on projects, and do more from anywhere in the world with Mero. Yes, Mero is an amazing tool for you to take your idea from inside your head and then put it out there for the world to see. When you think about Mero, think about zero to one. Building a startup

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is how startups beat those big, slow incumbents. So here's your call to action. Go sign up for Miro for free at Miro.com slash startups. That's MIRO.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? That's really where this will, this is where the rubble 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 or your LPs. Are there any LPs that I might not be in sync with? Startup founders generally don't have the luxury of caring where the money came from. And so if somebody who was Russian like Yuri Milner, who had money from a previous oligarch, and then he built up his chip stack, now he invest 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 Uri Milner? He made a series of incredible bets, Facebook being the best one.

And then he started working out of his own 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 the 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. So the kingdom, I think, I think the kingdom has basically pulled a Trump card to basically say, hey, we're active and here are our partners.

And I asked a very simple question. The kingdom has listed the venture capital firms that's backing. Founders, do you care? 30.8%, and this is after 4,000 votes, and I asked for founders only, so this is completely unscientific, but probably directly directly correct. 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 Indrison Horowitz as but one example 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 And Dristan 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. 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. and I worked there when I was maybe 21 years old, still in college during the human rights tours. And I built the first database of women's human rights violations around the world.

And I sat there and watched four interns on the network I built, a little four computer network, building a database, and I built the database myself. They basically just typed in what were Manila folders and box after box of human 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 violations, specifically against women. 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. have to do a search for a country, 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. And we fail, to be sure.

If you look at our justice system, it fails. If you look at the death penalty, that is against the universal declaration of human, human rights and cruel and unusual punishment that we have in our justice system where people are kept in solitary confinement for 23 hours a day. All of these things are horrible, right? And waterboarding, which we did during 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 that can be attained. And I actually believe that prosperity here in the United States, the model in Silicon Valley that we touched upon,

is based not just on venture capital and entrepreneurship. It's those two things for sure. But you have another factor, which is basic personal freedoms, the autonomy, 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, 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 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, times venture capital, times entrepreneurship, is the prosperity that we have here in the United States. But we might forget about that human rights. because we take it for granted. It's built into our system. It's in the Constitution. And if we as leaders here in Silicon Valley are going to export Silicon Valley around the world, I want to make a simple play.

Let's keep this variable in the formula intact. 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. And my funds are small enough that I have the option of not raising money from the Middle East. But I also wouldn't want to leave out the possibility

of 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 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, or companies launching the Middle East, obviously Uber had cars running in the Middle East and I'm sure many companies here in the United States have outposts there. engagement will ultimately lead to change. And as hard as it is to engage when things are out of sync, specifically the murder of Jamal Khushoggi comes to mind, we have to think deeply as a society, do we want to have a deeper relationship 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? It's well above my pay grade to know what will happen here 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. 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.

when somebody, when there was a rash of suicides at Foxcon factories, Tim Cook had to address that publicly here in the United States. And he had to then put pressure on Foxcon 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, folks. There is no simple solution. But I want to talk honestly about them here on this podcast. 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. 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? Would I be allowed to publish this episode in 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, 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 and not talk about the difficult issues. Which is it? I will choose to talk honestly about these issues. 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. Imagine this. You've got the greatest idea ever for a tech startup, and it's going to change the world. But you've got a problem. You don't have the engineers you need to make this a reality. Why? It's hard to find engineers, right? Everybody's in competition for those great engineers,

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All right, 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 helped 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 concurrent 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. Again, I don't know if these are concurrent or consecutive. 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. And this is the Southern District of New York, which we've talked about many times. SDNY, they do not play, 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? A topic I talk about in my interview at 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. 30 felons under 30 if she gets convicted and we can put a bunch of other people on that list. She raised $20 million from investors including Apollo Global and Chegg. And they valued the firm at 35 million in March of 2020.

In September of 2021, J.P. Morgan Chase acquired Frank for $175 million. And she netted $45 million from the sale. So she owned about 25% of the company. In 2022, J.P. Morgan sued Charlie, claiming she provided a list of over 4 million fake customers in Diligent. And just today, April 4th, the SEC charged her with four counts of fraud. According to Pitchbook, the board of directors had Mark Rowan from Apollo Global and Michael Eisenberg from Elfee, A-L-E-P-H-V-C-Firm. I'm guessing some other internal Frank employees will get rounded up here or not. But this looks really bad.

And this is why we train our founders in the launch accelerator. When they pitch their companies, we'll have a founder off and say, here are our customers. and our pipeline and who's using our product. And they'll mix that all into one sentence. Okay. And then you'll see 20 logos. And then it's up for the VC or investor, Angel, seed fund, somebody who's going to join the company to look at those 20 logos on that page.

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 pay 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 our paying customers on one slide, and it's 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. And then people can say, okay, pipeline means nothing. Trialing the software means something, but not all that much. And paid means a heck of a lot. 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 have an internal term. We call them letters of nothing, L-O-Ns. Letters of intent are what entrepreneurs who don't have the hoods but a charge

for their product do instead of being a product that people will actually pay for. 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 J.P. Morgan and now the SEC. It's the same allegations. At some point at 2021, two major banks expressed interest in acquiring Frank. Frank CEO, Charlie, told J.P. Morgan that it had four million users. In diligence, they asked for a list to verify.

Initially, they refused saying she could not share customer list due to privacy concerns. That's a red flag. 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, especially if you're putting hundreds of thousands or millions of dollars into a company. It makes absolutely no sense. There's so many ways to do this to avoid privacy concerns. You could just say, hey, here is, we've got our entire four million customer list. We're going to randomly sample, give us 10 numbers. Give us 100 numbers from 1 to 4 million. And we will take this list.

We'll have our attorneys, a CPA firm, or ourselves, pull those 100 names. We pull those 100 names. We then 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 100, 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, and just do some basic math on the random cohort, right? It's a random cohort. Okay. 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.

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. So Charlie approached, quote, a data science professor at a New York City area college to help. Hmm. Okay. Interesting to see who that is. Using data from existing accounts, the data scientist created a list of 4.2 million fake accounts. I'm guessing they told this data scientist they were doing some data science experiment

where they just needed four million 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 data science professor 18 grand for this list. And bingo, $175 million acquisition. So that $18,000 customer list, give them a $10,000 markup. Kind of reminds me of some investments I've made, except in those cases, they had real taxi rides and real accounts.

So, in reality, the JP Morgan lawsuit states, that Frank had fewer than 300,000 actual customers. 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, and we don't want our company to be terrified of errors and do nothing.

Of course not. But there does need to be some reckoning in the due diligence group at JP Morgan. If you're going to spend 175 million beans on something of shareholders, with shareholders money, better do your diligence. And you better understand what red flags are. Let's end here with a 38-second clip of who I predict will be the next perp walk and person to serve 10 years. Maybe she'll get to hang out with Sam Bankrun Fraud and Elizabeth Holmes. 38 seconds from Charlie.

We're really excited. we have a good thing going 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 from a strong foundation and I think when you do something that has you know 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 and as an investor they've never needed to take out financial aid

for themselves or for their children. Okay. Would I be able to detect this with my incredible reading skills? Maybe not. I would love to know what her parents did and how they raised her. I always look towards that. It does seem like these grifters come from a certain background. But this is a weird one.

because 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. Or maybe what happened in Madoff, where he started breaking the rules.

And then the cover up just became so huge that it became, you know, uncontrollable in terms of, in Madoff's case, like the new investors were paying off the sins of the lack of performance from 20 years ago. This to me seems like just outright premeditated fraud to secure the bag. 99 founders out of 100,000 would never do anything like this in my mind. But I would say a third of founders will bend the truth early in their careers. They'll be optimistic.

100% a founders should be optimistic. And that's where the lesson is here for founders. There's optimism. You're allowed to be 100% optimistic. 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. 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 has 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 grow to 30, 300, and then 3,000. And that that, you know, $10 that Uber made on those 3,000 rides could grow to $20, and there 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, 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 3,000 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, allegedly, she could have just found four 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. 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. 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. That's the name of the game. Accept reality and then build products and services that exploit the reality that exist 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? I can't find a place to go do meditation near me because I live in the suburbs and there's no meditation. 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. And if you do, Sam Bank Run Fraud, Elizabeth Holmes, and now Charlie, perhaps. And again, innocent until proven guilty. But when the SDNY goes after you, I think they only pursue cases when they're 99%. I'll just say this very seriously.

SDNY has a lot of cases they can go after. If this is an SDNY case, which I believe it is, they are 99. point X percent sure they're going to win the case. They would not bring it unless they had the person dead to rights. In what I've heard, listening to Prie Paharra's podcast, stay tuned with Prit. 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. study finance and law. Fate loves irony, does it not? I always see this, and I hate to be cynical. But what is it with Ivy League kids from privilege committing these crimes? 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? 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. Hmm. I guess we have to study that. I was going to be a forensic, uh, I was going to be a forensic psychologist. 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. Maybe I could catch more of these white collar crimes. Elizabeth Holmes, SBF, and now Charlie. I think they all had Ivy League pedigrees. Hmm. Hmm. Hmm. Hmm. 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, and I think it's easy because he's peculiar.

to throw rocks at him and because he does weird stuff and runs a company like it's a party. Interesting. All right, everybody. We'll see you next time on This Weekend Startups.