Saudi Arabia discloses LP positions & SEC charges Frank founder with fraud | E1713

0:00All 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 andresen horowitz founders uh ben horowitz and mark andresen 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 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.

1:03This 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 a founder of a company called Frank, which was bought by JP morgan chase for 175 million dollars has been uh charged with four counts of fraud by the sec and uh they found out about this because she allegedly created four million fake user accounts and i'm going to talk about entrepreneurship and when it's okay to boast about your success to create 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.

1:56So stick with us. It's going to be a great show.

2:22democratize collaboration and input sign up for free at miro.com slash startups and lemon.io need to speed up your product development without draining your budget hire vetted engineers from europe at lemon.io go to lemon.io slash twist to get 15 off for the first for 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 they're LP, who they're LPing, 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 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 andreason and ben horowitz and adam newman of we work fame and ben and mark are obviously from a16z uh they spoke at a saudi hosted conference interestingly the founder of that conference invited me to go to saudi arabia today um and keynote uh the conference so who knows maybe i'll make a trip to saudi arabia to keynote a conference on startups there.

4:09I'm open to it, talking about these issues. And I think engagement is important for all countries in the world 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 Sanabil, 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 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 and it can be in some people's minds a great way to diversify a portfolio maybe five or ten 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 their koto general atlantic iconic which was the family office for mark zuckerberg and it has a venture arm insight 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 manage over three trillion in capital in total it's 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.

6:20$620 billion, that's enough capital cover, almost every single dollar that the US venture capitalists have raised since 2016, according to PitchBook's numbers. So if you look at PitchBook's 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 if you pick the right funds 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 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 abhorrent and that are out of sync with uh 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 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 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 different outcomes with Ukraine and the invasion that Putin did.

8:19Maybe 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 Ohanian. 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 masterclass.

8:58There are amazing lessons from Bob Iger on leadership, Chris Voss on negotiations, and friend of the pod, Kim Scott on radical candor. and I have a little J. Cal cameo in that one. Hey, how about Gordon Ramsay 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.

9:34So 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 um 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 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 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 um according to pitch book again uh 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 1270 to 769 so let's just pause here for a second the number of venture capital firms raising money plummeted 40 from 2021 2022 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 calm 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 un 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, they probably want to get through this ingestion, indigestion period, where they've got all these markups on paper, but that TV PI to DPI hasn't happened yet.

12:32In 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 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 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 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 and it was even more drastic in 2022 than in years prior and you can see the share of us vc fund value by size bucket 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 raised by first time vc funds was down 52 percent last year from 21.6 billion in 2021 to 10.3 billion in 2022 it got halved again it makes sense when people were very frisky.

14:04It 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 Sequoia. You can't get into Andreessen Horowitz. You can't get into Excel or General Atlantic. A lot of the funds we see here, Plano 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 um uh are not going to get dollars 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 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.

15:26It 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 and so all of these uh 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 cutter uh qatar i've heard people pronounce it both ways here in the united states they say qatar and in cutter 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 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 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 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 these bridges and to get startups built in their country.

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18:18One that founders are going to love is the Complete Naming Mega Workshop. Yes, this is an incredible template for you if you're having a hard time picking a name for your startup, which everybody does, let's face it. I mean, sometimes you get lucky, but 99 out of 100 times, you're going to need a little help. You're going to want to do a little brainstorming. So go ahead and try that. Here's what I want you to remember. faster inputs equals faster outcomes and velocity 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 startups that's miro.com startups to sign up for free so uh this leaves us with the issue uh that is on everybody's mind and i tweeted about this do founders care that's really where this will um 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 um like yuri milner who had money from a previous 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 and then he started working out of his own uh returns that seem 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 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 a very simple question the kingdom has listed the venture capital firms it'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 directionally 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 injuries and 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 injuries and horowitz and some percentage of it I don't know, 10%, 5 % comes from Saudi Arabia.

21:15And 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. It was my dream job. and i worked there when um i was maybe 21 years old and 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 uh on the network i built a little four computer network building a database and i built the database myself um 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 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 and we 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 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.

23:13All 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 um 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.

24:23And 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 piece 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.

25:13There 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.

26:01engagement will ultimately lead to change and as hard as it is to engage when things are out of sync specifically the murder of jamal khashoggi 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 andreason 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 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 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 folks there is no simple solution uh but i want to talk honestly about them here on this podcast and if i do go to riad 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 etc 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 if what i would they 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 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 andreason 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.

28:53I 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 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. and you've got to manage your burn rate. You don't have unlimited resources like those big slow incumbents. You've got to be efficient. So now imagine you had a partner who could provide you with more than 1 ,000 on-demand engineers and these devs were vetted, experienced, result-oriented and passionate about helping you grow and they charged competitive rates.

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30:13Hire developers, smarter, faster. visit lemon.io slash twist 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 dollar acquisition by jp morgan chase of all possible buyers the founder's name is charlie juvis 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 again i don't know if these are concurrent or consecutive uh 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 gonna 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 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 dollars from investors including apollo global and chegg and they valued the firm at 35 million in march of 2020 in september of 2021 jp 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 jp morgan sued charlie claiming she provided a list of over 4 million fake customers in diligent in just today april 4th the sec charged her with four counts of fraud 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 um I'm guessing some other internal Frank employees will get rounded up here or not.

33:01But 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 paid customer? And they say, oh, they're trialing it.

33:40Okay, next one, next one. And we say, okay, founders, please. You can put here are paying customers on one slide. And it's two brands. 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 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 have an internal term we call them letters of nothing, L-O-Ns.

34:18Letters of intent are what entrepreneurs who don't have the chutzpah to charge for their product do instead of making 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 in 2021, two major banks expressed interest in acquiring frank frank ceo charlie uh told jp morgan that it had four million users in diligence they found out they asked for a list to verify uh initially they refused saying she could not share a 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.

35:11Red 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 4 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.

35:54And 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 today? How many logged in this week, this month? how much money do they have on deposit etc 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 in 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 scientists 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 4 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 dines the data science professor 18 grand for this list and bingo$175 million acquisition.

37:08So that$18 ,000 customer list, even a 10 ,000x 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 gonna spend 175 million beans on something of shareholders uh with shareholders money better do your diligence 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 perp 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 we're really excited 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 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 um 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 uh this is a weird one because i 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 um in madoff's case like the new investors were paying off the sins of uh the lack of performance from 20 years ago.

40:00This to me seems like just outright premeditated fraud to secure the bag. 999 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 % of 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 dollars 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 uh ten dollars that uber made on those 3 000 rides could grow to $20 and that could be$60 ,000 activity.

41:39We'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 3 000 of those studied that one percent 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 four 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.

42:33You 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 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.

43:22I'm not going to trade one share of Uber or Airbnb. be great what if we figured out a way to make trading free well 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 success of your company. That's allowed. It's allowed for you to delight customers.

43:55It'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.x 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 uh listening to pre-par's uh podcast stay tuned with pre-all right and uh 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 uh 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 and i hate to be uh cynical but what is it with ivy league kids uh from privilege committing these crimes is there some entitlement and 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 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 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.

46:49Interesting. All right, everybody. We'll see you next time on This Week in Startups.