THE START-UP SWINDLE The founders who conned us all
Silicon Valley has made millionaires out of thousands of millennials. But a world based on egos, power and dangerous hype has left many with their lives in tatters. Cosmopolitan investigates
When Penny Kim saw
a position advertised at a little-known start-up in Silicon Valley, she applied straight away. WrkRiot was a jobsearch start-up, and she figured it was her entrée into a world she badly wanted to be part of.
A few days later, she landed an interview, and was then asked to fly out from Dallas for a meeting in person “in the Bay”. Kim was impressed. She said the CEO introduced himself as a millionaire investor and a former JPMorgan analyst.“He seemed like a veteran entrepreneur – the kind I could trust,” Kim wrote in a blog post about her experience.
She was offered a salary of $135,000, plus equity and a $10,000 sign-on bonus. As marketing director, she was told that she would have a $4 million marketing budget and “carte blanche” to build her team. It all sounded too good to be true. Kim sold most of her belongings and packed up her car, left her cat with her boyfriend and drove to Silicon Valley.
Fast forward a couple months, and Kim alleged the Silicon Valley start-up had borrowed tens of thousands of dollars from employees, and pretended to have paid workers by Photoshopping fake wire-transfer receipts.
In June of 2017, the US Department of Justice indicted WrkRiot’s founder and CEO Isaac Choi on charges of wire fraud. Among the allegations: that Choi defrauded several of his former employees by luring them to join his company based on “false and misleading statements about his education, professional and financial background”.
The tech start-up boom has made millionaires of thousands of millennials – and thus become an irresistible lure for a generation who’ve given up on the traditional notions of a “job for life” and a corner office. But for every success story, there are hundreds of tales of failure, merciless in-fighting and even fraud.
The high-tech industry continues to be largely dominated by men, and for the women who are attracted to the field, the odds of job survival are tough. One study found that the attrition rate in this sector is over twice as high for women then it is for men.* The reasons? Lack of access to key creative roles, a sense of feeling stalled in their careers, and managers who undermine them (tales of perceived misogyny abound). Further studies also show that, in general, women and minorities often get laid off first, as the roles they tend to occupy are seen as expendable.
For those like Kim whose start-up dreams vaporise, the fallout can be brutal.
“Honestly, I feel it’s a form of PTSD,” she says, wearily. Now working at an agency in Dallas, she explains that any kind of change at work causes her to “freak out”. And when the
“He seemed like the kind of person I could trust”
FBI called to tell her about Choi’s indictment, she said the first thing she asked them was, “What does this mean for me? That is always on my mind. This isn’t over yet.”
TOO BIG, TOO SOON
On the surface, the start-up world appears robust. There are more so-called “unicorns” – that is, private companies valued at $1 billion or more – than ever before. As of July 2018, there are an estimated 258 such companies, according to research firm CB Insights, up from 10 just six years ago. Uber, valued at $68 billion, tops the list, followed by the Chinese equivalent, Didi Chuxing, at $56 billion.
Many start-ups position themselves as “disruptors”, using technology to upend traditional industries and ways of doing things like hailing a taxi, booking a hotel room and buying property. They talk about changing the world, and create millionaires in the process. It’s easy to see the allure.
Silicon Valley’s “work hard, play hard” mantra created workplaces that resembled adult playgrounds: slides between floors, video games, pingpong tables and basketball courts, intended to help offset the long hours and entice (and retain) top talent.
And then there are the perks: the free beer, coffee, food and discounted gym memberships. Some of the bigger tech companies offer full-pay parental leave (LinkedIn), on-site wellness and healthcare services (Google), unlimited vacation and parental leave (Netflix), annual travel stipends (Airbnb) and life insurance and “survivor support” (Facebook).
But in the rush to find the next Uber or Airbnb, investors sometimes pour cash into start-ups before they prove their worth. Start-ups try to grow too fast too soon. The results can sometimes be disastrous. Unicorns are also frequently overvalued – on average, by about 50%.
Then again, this is a culture that has embraced failure and celebrated risk-taking. Facebook’s famous motto was “Move fast and break things”. (In 2014, the company changed it to the less-sexybut-far-more-practical “Move fast with stable infra” – as in “infrastructure”.) Amazon CEO Jeff Bezos has openly joked about his “billions of dollars of failures” – but, of course, that’s because his company has been a huge success. Among some of the more noteworthy failures is online HR software company Zenefits, which at one point was valued at $4.5 billion and then plummeted to half that amount after it imploded under the weight of its own internal problems, including the fact that the company was selling health insurance without the proper licensing. Last February, it laid off half of its staff – about 430 people – after settling a suit with the US Securities and Exchange Commission. Another start-up, Theranos, which promised technology that could test for hundreds of diseases using a pinprick of blood and was once valued at $910 billion, was found to have questionable methods and inconsistent results. In June, founder Elizabeth Holmes, once among the youngest self-made female
billionaires in the world, and Ramesh “Sunny” Balwani, Theranos’ former president and Holmes’ former boyfriend, were indicted on charges of conspiracy to commit wire fraud (both pleaded not guilty). She is said to have lied about her company’s technology and aggressively tried to quash sceptics, including those who asked for evidence of her claims.
These start-up failures aren’t just happening in Silicon Valley. London-based tech-music start-up Crowdmix collapsed in spectacular fashion, blowing through £14 million before it even launched a product and filing for bankruptcy in 2016.
Lorena Blattner, a thirtysomething Londoner who managed strategic partnerships for the company, said problems were evident from the day she started the job.
First, she noticed only a handful of other employees besides her had a music-industry background. Then, the company’s focus kept shifting.“They changed direction every other day,” says Blattner.
Nevertheless, Crowdmix had a huge amount of momentum behind it. Property tycoon Nick Candy was its main investor (though there’s no suggestion he was involved in the failure of the business), and the company raised millions before it even had a product. Blattner described the office atmosphere as “buzzing”, but the mood changed when everyone’s salaries were late.
For a brief period, Blattner was expected to do business as usual working from home, she says, but eventually she stopped working altogether. Blattner says the company still owes her two months’ salary.
Reflecting on her experience at Crowdmix and Rdio (another failed music start-up), Blattner says these young companies have “a childlike drive and confidence, which in theory is great, but it also leads to erratic behaviour. Business acumen and common sense would save a lot of them.”
With so much money involved and a culture that favours “disruption”, perhaps it’s not surprising that the start-up world is full of horror stories. When I asked Penny Kim whether she thought there was something about Silicon Valley’s start-up culture that not only permits but encourages bad behaviour, she said,“I see Silicon Valley as a really easy target for a lot of people who want to take advantage of opportunities – good or bad. You attract the scammers and the talent.”
Sometimes it’s hard to tell between the two. Just two hours before taking her last final exam at New York University in December 2011, Hannah† was scrolling through Facebook when she saw a job advert that caught her eye. It was for a position at Fab.com, a hot e-commerce start-up located in New York City’s West Village.
Hannah had interned at an investment bank that focused on early-stage companies, and she knew she wanted to plant herself at one of them. She began following the company’s CEO and founder, Jason Goldberg, on social media.
Goldberg was something of a notorious figure in the start-up world. He’d raised $48 million for his previous start-up, Jobster, only to run it into the ground. Yet his charisma was undeniable. He had managed to evolve Fab. com from a social network for the LGBT community into a hugely successful flash-sale site.
Just a few hours after applying, Hannah was called into Fab’s office for an interview with Goldberg and co-founder and chief creative officer Bradford Shellhammer. She was offered the position before she even got home.
In the beginning, it was everything she imagined.“You walked in every day and it was kind of like a playground,” she says. Banana scratch-and-sniff wallpaper and vibrant lamps, rugs and bean bags filled the space. Candy – literally and figuratively – was everywhere. There were free snacks, beer and lunch every day, as well as subsidised gym memberships. For a brief period, the company also held raffles, awarding $500 to the employee who could most closely guess what time their sales would surpass $1 million.
Hannah says she felt as if she was “on this rocket ship that would keep flying”. The company raised more than $330 million, and at one point was valued at $1 billion.
“Every day it was like a kind of playground”
So when they began abruptly laying people off, most were caught completely off-guard. “We thought we were doing great,” Hannah says. “We had no idea.” Hannah was one of the last employees to be laid off. Luckily, she was recruited to work at Gilt Groupe, another hot e-commerce start-up that followed a similar trajectory: once valued at about $1 billion, it was eventually sold for just $250 million. All in all, Fab.com laid off or fired about two-thirds of its 700 employees. In 2015, the company was sold for just $15 million.
Though Goldberg now runs a new, successful business, the dramatic rise and fall of Fab.com is a cautionary tale – “How Not To Strangle Your Unicorn” was the headline on Bloomberg. According to Business Insider, Fab.com burned through $200 million in two years, sometimes spending $14 million per month. It had a savvy co-founder with a knack for raising cash.
Because ultimately it’s not just the technology or mission that’s alluring, but the people – overwhelmingly men – who are selling it. And the qualities that make some founders so magnetic are the same ones that can blind people to their hubris.
CHASING THE DREAM
As more and more stories have emerged of highly valued start-ups failing to live up to expectations, a wave of panic has set in. Two years ago, Forbes asked if it was “The Year of the Unicorn Apocalypse in Silicon Valley”.
Still, start-ups retain their status as dream destinations, and people – including thousands of women in their twenties and thirties – continue to flock to them daily.
Blattner now works as a music editor for a digital company, but says she’s not averse to working at another start-up. Except now she approaches interviews differently to before. “I’m asking every possible question to identify whether there’s another potential bust,” she said.“I’m not done with the music industry or the tech industry, I’m just extremely careful.”
For Kim, there is some closure. Earlier this year, WrkRiot’s CEO, Isaac Choi, pleaded guilty to wire fraud. As part of his plea, Choi admitted to lying about his credentials to recruit prospective employees and emailing employees fake wire-transfer receipts as proof of payment in order to get them to continue working for him. He was sentenced to three years of supervised release, and ordered to pay $91,376.04 to five victims, including Kim.
Despite all this, she still has dreams of working in Silicon Valley.“I have a lot of faith in the people and the ideas that are coming out of there,” she says. “I don’t think that this one example is indicative of the culture as a whole. It’s one bad apple. There’s a lot of great things happening out there. I just have to find the right fit.”
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