Kara Holm is a master’s student of fine arts in creative non-fiction at the University of King’s College in Halifax and is writing a book with the working title, Upstarts: Founders, Failure, & the Startup Paradox.
As a recovering startup founder who is engaged in healing and self-exploration since giving up on my business, I am fascinated by the long line of hotshot entrepreneurs falling from grace.
WeWork, the co-working space, sought bankruptcy protection on Monday, after a rise and fall marred by founder Adam Neumann’s erratic behaviour and an investigation by the New York State Attorney-General. Then there’s Sam Bankman-Fried and his FTX cryptocurrency exchange: He was found guilty of fraud and other crimes last week.
Earlier this year, med-tech Theranos founder Elizabeth Holmes began serving her 11-year sentence for fraud – appeal pending – and Charlie Javice, the founder of student-loan startup Frank, has been charged criminally for her alleged misrepresentations to JPMorgan on the heels of a civil suit over the same issues.
These cases are not simply a few bad apples who were once hailed as wunderkind. Rather, they are illustrative of systemic issues in startup culture taken to the extreme.
When I had my startup, a mobile game and marketing platform called TerraProForma, I learned that founders must believe that they and their businesses are exceptional. The reality is that half of businesses close within five years.
This is what I call the startup paradox: Founders know the chance of success is low but must suppress that knowledge to proceed. Every day, they promote their businesses to attract customers, investors and employees. And founders must believe their own hype, or no one will come along on the adventure with them. The most successful ones are fantastic storytellers with compelling narratives.
The odds are against founders at every turn. When I had a concept illustrated by an explainer video, investors wanted to see a demo. When I had a demo, investors wondered when I would have a minimum viable product. When I had an MVP, investors asked when I would have results from a pilot. When I completed a pilot, investors wanted to see data from more pilots.
The goalposts kept moving, and that is where it ended for me. I didn’t have the confidence to keep chasing the money or the cheek to oversell my situation.
The motto, “Fake it ‘til you make it,” was not for me, even though I continued to believe in the idea of my business. But perhaps you wouldn’t be surprised to learn that the catchphrase is a common practice among founders. I met one who was proud to share that early in his business he sent empty machines to a client so he could both meet his delivery date and buy a few more days to finish the product. This is the trap that caught Ms. Javice and Ms. Holmes.
Ms. Javice overstated the number of active users on her platform, which contributed to the US$175-million valuation JPMorgan attached to her business. Ms. Holmes, meanwhile, has been found guilty of defrauding investors by posting false results and overstating the capabilities of her technology. I have no doubt that both believed that, with more time and even more money, their products and tech would catch up to their vision.
These founders may have known what they were doing was wrong but justified their actions because they were playing the long game and had a higher purpose. Whatever their intentions or awareness of the line between commitment to their mission and fraud, all are now living with the severe consequences of faking it until they made it.
Commitment to mission sounds harmless, but it, combined with the commonly held view by startup founders that they are “making the world a better place,” is dangerous. You may have noticed that many famous founders have messianic tendencies.
Mr. Bankman-Fried siphoned money into his hedge fund from his cryptocurrency exchange to finance his lifestyle, which included making large donations to influence the political outcomes he thought were in the best interest of the country. One can imagine that, as an effective altruist, he justified his actions because he was working toward what he saw as the greater good.
Mr. Neumann has not faced any criminal charges but has repeatedly claimed WeWork to be profitable despite evidence suggesting the contrary. He has also been accused of buying real estate and leasing them back to the company at inflated prices. He had also bought the trademark to the word “We” and leased it back to the company for US$6-million (he has since returned the money).
The structure of the startup ecosystem rewards founders who show the potential for extraordinary growth, tempting even those with more modest aspirations to stretch the truth to get a small share of the available funding.
I wonder how these cases will impact garden-variety founders trying raise money in the future. And I hope that these spectacular falls will challenge us to think differently. The startup sector is ready for disruption.