In the latest example of a startup getting caught taking Silicon Valley’s “fake it until you make it” ethos far beyond the realm of ethics, events planning app IRL was recently sued by its own investor, SoftBank, after an investigation revealed that 95% of the app’s users were fake.
It’s the larger companies that usually get the most attention for screwing up — as this lawsuit highlights — but younger startups are now increasingly getting caught in the act, too.
In my reporting for this story, multiple investment firms told me that they didn’t really have a good answer for weeding out such instances of fraud because they invested “too early” and were focusing more on betting on the founders instead of verifying their user base or traction.
But even if you are betting on a founder, wouldn’t you prefer to invest in one who isn’t trying to deceive you? As I’ve said before in prior stories, ignoring issues early just sets you up for larger and, in many cases, unfixable issues later.
Sure, investment firms focused on later-stage startups do have more data to study — and resources like auditors — to conduct due diligence. But Angela Lee, a venture capital professor at Columbia Business School and the founder of 37 Angels, said there are actually numerous ways an early-stage focused firm can detect and avoid startups that are trying to deceive them.
“[An investor who] uses the excuse of ‘it’s too early, we don’t need their diligence,’ is a lazy investor,” Lee told TechCrunch+. “We are in the age of information; it is easier than ever to verify these things.”
Lee said an easy way to see if you need to dig deeper into a startup’s metrics is to gauge how founders answer questions during the pitch.
Entrepreneurs look to put a positive spin on things and put their most favorable numbers on their slides for the pitch, Lee said, and while they don’t necessarily intend to deceive, founders should be able to answer questions about the numbers and metrics they left out.