Venture capitalist Chamas Palihapitiya. Mark Kauslarich — via Bloomberg, Getty Images
last week, luck reported on the demise of social app startup IRL, which was valued at over $1 billion a few years ago, announcing that it was shutting down because 95% of its users were fake. This week, venture capitalists weighed in on the debacle, highlighting how investors made a big mistake.
IRL joins the ranks of unicorns (companies with an undisclosed valuation of at least $1 billion) thanks to a $170 million Series C funding round led by SoftBank Vision Fund 2 (return investment The house included Goodwater Capital, Founders Fund and Floodgate). The total amount reached over $200 million. Allegations of the company’s “zombiecorn” status grew after CEO Abraham Shaffi resigned in April following employee complaints about inflating user numbers.
and all in On Friday’s podcast, venture capitalists debated the investor due diligence—or lack thereof—that would have exposed IRL’s inflated user numbers.
A key role of VCs is to “ask uncomfortable questions and do uncomfortable diligence,” said angel investor Jason Karakanis. “You can trust the founders, but you have to verify that the data you have is correct.”
Craft Ventures general partner David Sacks added: “For us, the most important part of diligence, besides looking at the metrics that everyone can do, is the off-the-sheet reference, the dialogue with the customer. It’s a list you’ve come up with yourself, not from the company itself. .”
Chamas Palihapitiya, who founded the venture capital firm Social Capital in 2011, points out that checks and balances are inadequate and what he considers to be a “very inexperienced” venture capital firm, saying, “How to ask basic questions? I don’t even know, or I don’t even know how to ask an even more insidious question.” You don’t have the courage to say difficult things. And then something happens that is frankly unforgivable. ”
Venture capital may look easy from the outside, he added, but “the reality is that we have a handful of legends in our business.” And when it comes down to it, in the boardroom or in the middle of hard work, the “inexperienced” may lack the guts to challenge a startup leader, he said.
“There must be conflict,” he said. “I think this is a necessary characteristic of good decision-making. That conflict arises within the investment team, but it also has to occur externally with the startup management and the CEO himself.”
Investors also pointed to the size of the SoftBank Vision Fund as a problem. Founded in 2017, the original fund has raised over $100 billion in capital.
“When they make a mistake, it’s 20 times bigger than it should be,” Sachs said. The IRL “probably should have been a $10 million mistake…but the size of their funds basically forced them to write these huge checks.”
“The size of such a fund can increase because there is an annual management fee paid,” Parihapitiya said. Rather, it is to get 2% in a smaller number,” Palihapitiya said. .
Former Facebook executive Palihapitiya himself has been linked to Silicon Valley excesses. The billionaire has earned the nickname “SPAC King” for bringing to market a number of high-risk start-ups (most of them unsuccessful) through special purpose acquisition firms.
“When a big fund gets 2%, suddenly profits don’t matter, which means results don’t matter,” he said. …it’s going to be a flimsy thing like this.” He can point to a fig leaf and say, “We’ve done our job here. Give us more money for our next fund.” That’s the fierce competition in the venture community, and companies like IRL will likely see it too. ”
“We are at the beginning of a hype cycle” when it comes to artificial intelligence, he added, although we expect similar developments with the emergence of new AI companies today.
