Update 2/22/23: Correction that OZY Media COO, Samir impersonated a YouTube executive and the addition of a note about OZY Media CEO, Carlos Watson being arrested for fraud.
With the recent death of Gawker 2.0, I want to explain how the first Gawker acted as a flawed Guardian of the startup world.
Most figures in the startup world only see press in the form of predictable mentions from the efforts of PR firms. Sam Bankman-Fried, Elizabeth Holmes, Charlie Javice, and others flew near enough the sun to merit media scrutiny. But the behavior of each is typical of startup founders at every stage.
At one time, Valleywag part of Gawker served as a tattletale hall monitor for the startup community. But since Peter Thiel sued the publication out of existence, the startup world has run amok without media coverage until hundreds of millions of dollars are involved. That’s a problem for the entire ecosystem.
People like to worship innovators. In the startup world, the belief innovation excuses all is prevalent. As most subscribers to the belief seem to see it, they are the innovators being excused. Paltry restrictions such as contracts, reasonable disclosure, and compliance with the law do not apply to them.
Elon Musk Is Peak Startup Bro
Twitter is no startup; it is a 16-year-old company that IPOed over nine years ago and was taken private again via the seventh-largest acquisition of all time. Elon Musk’s behavior, however, is peak startup-bro. Only months into his tenure as Twitter’s owner, he stopped paying office rent and is considering not paying severance packages to former employees.
Even before the acquisition, Musk’s willingness to breach a 44 billion dollar deal was identical to founders who stiff service providers for a few hundred dollars. I know this because I’ve been dealing with startups since I was a teenager.
If Musk doesn’t pay bills, he gets panned by the mainstream press and drives up legal fees defending inevitable lawsuits. All with an attitude that he’s too big to fail. Small startups operate under the radar. Too small to sue and not worth writing about.
Ten years ago, two startups out of a Forbes top 10 rated startup accelerator stiffed me on petty amounts of money for services provided. The company that owed me $150 went on to raise $630K before going under. The one that owed $1,200 raised $1.1 Million prior to exsanguination.
Weak Due Diligence And Huge Upsides
They didn’t pay because they had no reason to pay. Due diligence is incredibly weak in early-stage startup investing. Problems not apparent in lawsuits and media coverage often go unnoticed. Startup investments are high-risk, high-reward, and most are expected to fail. Those who invest in startups invest in a lot of them.
A startup failure isn’t the end for a founder, as investors frequently fund the same founders again. Founders with a failed startup behind them are generally better able to find funding from the same investors for the next venture than first-time founders.
For the investors getting in at the ground floor for a few big successes offsets the failure of most companies. For founders, weak due diligence and the possibility of fat checks have led to some outrageous lying.
JPMorgan Chase acquired a startup called Frank because the company had over 4 million users. A lawsuit filed by JPMorgan Chase claims that the company only had 300,000 real users and created 4.265 million fake customer records to satisfy due diligence.
A couple of years ago, news broke that Ozy Media COO, Samir Rao impersonated a YouTube executive during a call with Goldman Sachs while attempting to raise $44 million [correction an earlier version of this story stated incorrectly CEO, Carlos Watson]. Goldman’s due diligence team picked up on the red flags Ozy Media was flying and didn’t invest. Others, including Axel Springer, Marc Lasry, and the Ford Foundation, did invest $70 million, according to Crunchbase. Ozy Media CEO, Carlos Watson has been arrested for fraud charges.
My only link to OZY Media is that they once rejected an article pitch. Much as I’d love to believe any publication that won’t run my words dies in a ball of shame, I have no connection to Frank. It seems red flags were overlooked in part because lawsuits and articles didn’t document them.
I wrote about how Spring Free EV, a startup helmed by multiple-time Founder Sunil Paul breached a contract with my firm. Before attempting to settle the breach, a Spring Free EV representative called my former business partner to ask if I would sue. Because in the startup world, debt only exists if someone sues.
Due diligence, folks called me because of the article. I don’t know if my little piece impacted investors’ decisions. But I know public records, even in small blogs, matter.
The PR Spin Machine
Sam Bankman-Fried spent years in a vortex of disgustingly positive media coverage. He raised $1.8 Billion for the crypto exchange FTX according to Crunchbase. The FTX story is insane; a company seemingly without any form of corporate control passed the due diligence of major investment funds and their associated consulting firms.
Bankman-Fried is not yet convicted and pleaded not guilty to fraud charges. But if I had to make a bet, he will likely go to prison after losing his investor’s money and billions of dollars in customer funds. Another bet I’d make is that Ontario Teachers’ Pension Plan, Sequoia Capital, and Tiger Global wouldn’t have put in a collective $347 million without the media hype train.
Elizabeth Holmes, the founder of the failed blood-testing startup Theranos, received an 11-year prison sentence for defrauding investors. Holmes was found guilty on four of 11 fraud charges. Holmes did not commit fraud without any red flags. She committed fraud while Forbes, Inc., Fortune, and many more hailed her as a visionary genius.
Innovators Get A Pass
It’s not just the media hyping innovators. Investors love the spirit of “innovation” that gave us Sam Bankman-Fried, Elizabeth Holmes, and, yes, Elon Musk. In reply to a Tweet early in July 2022, when Twitter’s board chair announced that Twitter would sue Musk to enforce the merger agreement. Ev Williams, who co-founded Twitter, said,
“I’m sure there are legal/fiduciary reasons you have to say that, Bret. But if I was still on the board, I’d be asking if we can just let this whole ugly episode blow over. Hopefully that’s the plan and this is ceremony.”
Musk’s Twitter agreement for a $44 billion acquisition with a $1 billion fee for termination was signed and binding. For Twitter to “let this ugly episode blow over” would mean letting Musk out of a $1 billion termination fee. But Williams felt Musk earned a pass for some reason.
I expect Williams, like many in startup land, believes that innovators are exempt from the rules that govern the rest of us. Musk as part of the PayPal mafia, a group of former PayPal employees and founders, is grandfathered into being an “innovator”. The PayPal mafia, including Musk, Peter Thiel, and Reid Hoffman, among others with about as much power over startup land as the real mafia ever had over unions in New York.
Valleywag The Imperfect Guardian
I often criticized Valleywag, the Gawker Media gossip rag about Silicon Valley personalities when it was alive. In 2007 when Valleywag outed PayPal mafia member Peter Thiel, he set out to destroy them. As the New York Times put it, “He funded a team of lawyers to find and help ‘victims’ of the company’s coverage mount cases against Gawker.”
Thiel successfully killed Gawker when he funded the lawsuit of Terry Gene Bollea, known better as Hulk Hogan. What Gawker Media did to Hogan and Thiel was horrible and lacked any public interest. But without Valleywag, negative startup coverage doesn’t seem to begin until a billion dollars is involved.
Perhaps Valleywag maintained a balance of power between the worst behavior in the startup world and everyone else. Only some investor-enabled psychopathic founders fail to the level of Theranos. The ecosystem was healthier when startups had a chance for headlines they didn’t want.
Article by Mason Pelt of Push ROI. First published in MasonPelt.com on February 7, 2023. Photo “Peter Theil at the Hy! Summit – March 19, 2014 – Image by Dan Taylor-132” by Heisenberg Media is licensed under CC BY 2.0.