Like Icarus who fell from the sky when he got too close to the sun, celebrated startup founders with questionable intentions can find themselves in hot water- fast. Unlike the ladder-climbing, weathered briefcase-carrying executives of yesteryear, today's crop of business-minded professionals are all about rapid ascents in the form of highfalutin promises of industry reinvention and massive injections of cash to get them there.
Due to a lack of industry experience and plenty of (sometimes too much) confidence, their falls from grace are often dramatic indeed, especially when these American as apple pie up-and-comers knowingly pushed an idea that would cause potential harm to others. Suffice to say, when a founder strikes it gold, it's magic, but when a founder is disingenuous, it's dangerous.
“Investing in startups is risky but with the right leader, the right product or service with excellent execution there is no doubt that the upside could be fantastic but it also could as easily go to zero," says Gregg Garnick, an entrepreneur and investment banker, well versed in the unique culture of startups. “Know that you can lose everything if things don't work out or the leader turns out to be dishonest or unethical."
In general terms, gone are the days of working one's way up through a long-standing firm, becoming top dog only after having experienced almost every role, including the coffee proprietor. In today's me-first economy, overzealous twenty somethings are choosing their own roads to becoming moguls; dropping out of school and naming themselves CEOs of their own companies. Derek Lidow, Founder and CEO of iSuppli and the author of Building on Bedrock, calls them high-risk entrepreneurs and he says they are all but replacing traditional “bedrock entrepreneurs" who once believed “slow and steady wins the race. While of course, some of the high-risk iteration do strike it hot, most are unable to take their lofty ideas and massive investments to mythical status.
“We read about all the unicorns and their celebrity founders, so we aspire to be like that," says Lidow, also a professor at Princeton University. “If the objective is to get rich quick and to be labeled a unicorn, then the objective becomes to market an idea that'll get lots of people to want to buy your product. As we all have read about Steve Jobs' 'reality distortion field,' we think we can do that too and that we can, through sheer force of will, make implausible promises come true."
In the case of Jobs, we must admit it's a romantic, even enviable parable: a fiercely capable young entrepreneur relentlessly pursuing a business idea that would go on to quite honestly change the world. Job's vision, drive and leadership skills are indisputable, but not common, regardless of the speed at which new ventures are being launched.
“The facts are that most aspiring entrepreneurs today do not understand what Steve Jobs really did or did not do himself, and therefore have no idea how actual innovation takes place, so they wind up selling people fantasies," adds Lidow. “Too many entrepreneurs are willing to say literally anything to not accept the fact that they have no credible way to make their fantasies come true."
Today's “innovation" most usually means “a newer version" of something already successful, and it's rare to find founders like Ran Ma, Julia Cheek and Randi Zuckerberg, (all of whom have appeared on SWAAY) who are introducing truly groundbreaking products and services to the market. Of course no startup can get off the ground without funding, so one must ask if today's VCs are chasing pipe dreams rather than pursuing due diligence.
“Many founders think they are revolutionizing industries that quite honestly they aren't," says Owner of Jessa Moore Media, Jessa Moore. “There is a lot of misrepresenting going on, not just for consumers but for investors as well."
According to Moore, who is well-versed in the rise and fall of startup culture, the amount of money up for grabs in Silicon Valley and beyond, means those businesses who make the biggest splash, with the biggest promises and the most outspoken founders, are the ones who tend to get what they ask for. “Those who get to the top are the most ruthless," she says. “The idea that you can impact and affect a certain segment of the world is addictive. But the power can get to these founders' heads and it becomes a little like The Emperor's New Clothes."
A still from the Fyre Fest promotional video, featuring top models like Rose Bertam, Bella Hadid and Emily Ratajkowski
When it comes to founder promises vs. deliverables, perhaps the most illustrious examples of failure in the form of dishonesty is Elizabeth Holmes, whose health tech company Theranos-once backed by more than $900M in VC funding-was built on little more than a good idea and even better marketing. Despite the fact that an unknown number of people may have gotten sick from her company's malfunctioning blood reading machines, and one person committed suicide due to the scandal, Holmes is hoping to rise from the ashes, thanks to a newly-disseminated $100M loan investment from Fortress Capital. There aren't many details about her still hush-hush future business aimed at tackling the Zika virus, but the fact that she's being given another chance, in healthcare no less, is certainly controversial.
Of course not all startup founders deliver on their promises, but there's a difference between knowingly subjecting patients to erroneous and potentially life-threatening lab results, and not revolutionizing say, the juicing industry. The second chance may be a godsend to Holmes, who fought with a warrior-like aggression to get her company to the heights, but it calls into question whether or not a founder who has acted unethically should be trusted again.
“No doubt those that lost money in Theranos will be creating legal havoc for Ms. Holmes for many years to come," says Garnick, who believes that there should always be an opportunity for disgraced founders to reinvent themselves. “Certainly the majority of business startups fail and yes people lose money when this happens. But this doesn't mean that the next attempt won't capture lightning in a bottle."
Another fallen startup hero with a questionable morality code-albeit less centered on human health- is Billy McFarland, the infamous founder of Fyre Fest, which may or may not be returning for a round two in the near future. Despite blaming weather, third party vendors and everyone else but themselves for epically failing to deliver on the promise of creating “the Coachella of the Bahamas," McFarland and his famed business partner, Ja Rule (who literally wrote “this is not my fault" on his Twitter feed, are facing various class-action civil suits from concert-goers as well as criminal charges including wire fraud and making false statements to a bank.
Those close to the scandal all but confirm the fact that McFarland knew the event would be a potentially dangerous calamity for attendees, and yet he pressed on, reportedly because he was dependent on ticket sales to turn a profit. Although there's been relative radio silence since McFarland announced 2018 makeup dates to disappointed fans, some of whom forewent the chance of ever seeing a refund, last we heard there would be a “do-over" festival this spring. Jury's still out on whether that's happening, but the thought that anyone would fork out hard earned cash for another McFarland-hosted event is hard to take in.
“Fyre Fest defrauded customers, similar to what happens a little too often with some Kickstarter campaigns, but where Kickstarter fine print warns that buying into a not-yet-realized idea is risky," says Lidow. “Fyre Fest never was able to raise significant funds from investors, and consequently only had the up-front cash that customers gave them for the festival, which was nowhere near enough to do what they had promised."
Throughout SWAAY's interviews with industry experts regarding the question of intention in startup culture, it became clear that most believe that regardless of how much cash a founder might lose, or-even more interestingly- what ethics violations might be broken, if he/she is not incarcerated for his/her crimes, most believe there should be an opportunity to bounce back. In fact, the law states that as long as a failed entrepreneur doesn't go to jail for fraud, he/she is is free to try again.
“America is the land of second chances, so it's difficult to regulate leadership ethics in a way that would prohibit incompetent or unethical founders from getting a chance to right their wrongs after a failed first attempt," says Rizzetta, CEO of North 6th Agency, a firm dedicated to helping build and manage startups. “However, the power is ultimately in the hands of the investors and board members, so these founders will only get a chance at redemption if the people controlling the money and the org charts are supportive of them."
According to Rizzetta, the secret to bouncing back after scandal is by admitting defeat, publicly calling out mistakes and addressing them openly. There's no way to undo missteps, but proving to be smarter in the face of one (ala Uber, Facebook and Wells Fargo), is the way to go.
“Absolutely, a disgraced founder or company can succeed in their second chance after a failed first attempt," says Rizzetta. “In order to make the comeback successful the founder must tackle their challenges from the failed first attempt head-on, and confront any questionable practices that they were criticized for with a level of transparency and honesty that their employees can appreciate. The worst thing a 'second chance' founder can do is hide and pretend like it never happened the first time around."
In fact, Lidow revealed that even famed entertainment icon, Walt Disney, rose from the ashes after facing the bankruptcy of his first animation studio in Kansas City, where several local investors thought he defrauded them into losing money on mismanaged business. “Walt Disney was able to come back because he: 1) got out of town, and 2) enlisted his financially conservative older brother to be his financial partner and keep his spendthrift ways (partially) in check," says Lidow.
The Founder Formula
For those looking to get rich quick in 2018, the media message is “be an entrepreneur." Although there are those founders who set out to improve the world and the lives of their consumers, most see becoming self-made as a path to financial prowess and social power. Although there are many who would like to take this path, it's important to remember that only a very specific segment of the population ever get the opportunity, and spoiler alert: they are not exactly diverse. Like Steve Jobs before them, today's success-eyeing founder is usually male, Caucasian, upwardly mobile, and extremely confident to the point of refusing to backtrack-no matter what.
“Entrepreneurs are a breed that most likely see something that the majority does not," says Garnick. “This vision becomes almost like a drug that drives the entrepreneur and excites the imagination of the perspective investor. The vision when turned into a demonstrable product or service can be a powerful enticement to convince people who dream of being the next Bill Gates to write big checks. In our society people believe that riches and money will create the fantastical life that is so well marketed by Madison Avenue and this ecosystem creates an infinite number of perspective investors dreaming of the dream."
Both Holmes- a rare female swimming in the sea of male sharks- and McFarland are white, well-off and well-connected. Similarly, both dropped out of top-tier universities, created insular business worlds and specific public-facing personas: Holmes, of course, paying homage to Jobs through her muted outfit choices and eccentric eating habits. But unlike Jobs, Holmes put decidedly little importance on the product. “Elizabeth Holmes underscores a lot of problems in tech right now," says Moore, adding that today's founders tend to be those who can quite literally afford to lose. “She may have gotten her first investment simply from making a phone call. She does not have the background of a regular person."
Another commonality between Holmes and McFarland are the high-flying marketing and public relations campaigns they used to sell, sell, sell, even before a product existed. The focus on making noise rather than delivering, according to Moore, is becoming a common sleight-of-hand that entrepreneurs are employing to attract investors.
“Founders are using VC money as marketing, to help find future deals and money," says Moore. “Both were such a media stories ... and not much else."
Holmes' media splash meant creating and stoking a Jobs-like “genius" public image, making regular rounds on the morning show circuit, attending high-profile events and securing a headline-worthy board of directors, including Henry Kissinger and George P. Shultz. McFarland, on the other hand, decided to hit hard with the perfect one-two marketing punch for social media-obsessed Millennials. Yes, that glittering celebrity-studded video, which gave even mere mortals with near empty pockets the desire to join the Bahamian fun.
“Huge marketing investments may indeed make sense with consumer facing businesses where competitive advantage scales with network effects," says Lidow. “The problem is that people are throwing marketing dollars at types of businesses where these dollars don't convey a competitive advantage (e.g. B2B, or, electronic juicers)."
Sheer ambition, which may have bordered on hubris, is another common affliction found in those founders who insulate themselves in worlds of their own making.“Lots of times founders believe they are untouchable and suffer from 'bubble syndrome;' the concept of living in their own bubble and suffering from an inflatable sense of self-importance," says Rizzetta. “These traits can be the most toxic for any leadership team and ultimately facilitate collapses of businesses that would have otherwise reached incredible success."
Notoriously secretive, Holmes kept all employees, and investors in the dark in terms of what exactly she was doing behind closed doors. Although she was on the cover of magazines and winning awards, Holmes steered clear of those who might have seen through the charade. “Elizabeth Holmes got experienced people on her board, but nobody with experience of running a medical testing business," says Lidow. “She asked her dentist to run her testing facilities. She had terrible advice and all her advisors are as culpable as she in living in fantasyland."
Similarly, back in March of last year, when Fyre Media claimed to be worth $90 million, the venture capital division of Comcast Corp. passed on investing $25 million into Fyre Media, after “issues in due diligence," according to Bloomberg. “One such issue was that the company didn't provide information necessary for a forensic audit and didn't have a satisfactory billing mechanism, the person told Bloomberg in May, asking not to be identified because the matter is private."
“How can you tell a fraudster from a genius?," asks Lidow plainly. "Call in other geniuses to make an assessment. If an assessment is not allowed, then the person is very likely to be a fraudster."
The Moral Economy
“Silicon Valley is so unpoliced that it really still is the Wild Wild West," says Moore. “We are in a climate politically where people are taking away a lot of legislation, but from a digital tech perspective, I feel there will be more and more public pressure to be held accountable, and I think there needs to be because I think having no legislation for tech is a big part of the problem. In the next five years, precedents are going to have to be set."
Looking to the future, it is clear there is much work to do in terms of better monitoring business intentions to ensure there are less ethics violations, but according to Rizzetta, it comes down to the allocation of funding, as those holding the purse strings hold the power. “The keys are in the hands of investors," he says. “In the event where a business is being launched that has questionable ethics or is in the hands of incompetent leadership the business will only get off the ground if there are willing and supportive investors who choose to get behind it. You can't underestimate the power of investors when it comes to leadership ethics."
There certainly needs to be a greater priority placed on character and ethics due diligence, adds Lidow, particularly when it comes to investors and board members evaluating members of the leadership team. Experts recommend incorporating a series of checks and balances into business investments, and including third party experts and ombudsmen to ensure what is happening behind closed doors is above board. “If this comes at the expense of less due diligence around performance and business track record then so be it," he says. “Character due diligence is infinitely more important than performance due diligence on many levels."
“If society, inspired by many in Silicon Valley, is leading aspiring entrepreneurs [more than 60 percent of all Americans] to believe the right thing to do is 'shoot for the moon, use other people's money, and don't worry about failing,' then of course we're going to get lots of fantasy, along with lots of wasted money, and wasted lives, with some lies in the mix," says Lidow. "This problem has been around since Roman times. Basically, caveat emptor. Everyone should always be suspicious of any investment – or down payment – in something that promises breakthroughs or an unbelievably great product."
WRITTEN BYBelisa Silva