Speaker 1: Back in the fall of two thousand ten, Antonio Garcia
Speaker 1: Martinez was sitting in an apartment in the Mission in
Speaker 1: San Francisco. Antonio was co founder and CEO of a
Speaker 1: brand new startup called ad Rock. It was an exciting
Speaker 1: time for him. Yeah, Antonio at the time had just
Speaker 1: finished his time at y Combinator, which is kind of
Speaker 1: an elite startup accelerator of Silicon Valley. And at the
Speaker 1: end of your time at y Combinator, you do a
Speaker 1: big presentation in front of a room of entrepreneurs and
Speaker 1: investors and show off in two minutes what you've made.
Speaker 1: And Antonio's presentation had gone really well, and a bunch
Speaker 1: of investors were interested in giving him funding. And now
Speaker 1: he's sitting in the apartment of his co founder and
Speaker 1: they're all drinking a couple of beers and it's it's thrilling,
Speaker 1: and they're right at the precipice of all this opportunity.
Speaker 1: And then they get a call from a lawyer representing
Speaker 1: their company at Rock, and the news is devastating. It
Speaker 1: turns out that their former employer is suing the company
Speaker 1: for stealing secrets and stealing intellectual property, and it's basically
Speaker 1: a death knell for ad roc because who in the
Speaker 1: right mind would invest in a company that is plagued
Speaker 1: by lawsuits. So things are looking pretty bad. But because
Speaker 1: this is Silicon Valley where crazy dreams sometimes make it through,
Speaker 1: and Antonio is a scrappy guy, he's backed into a
Speaker 1: corner and he turns to his final resort, which is
Speaker 1: something that was definitely dishonest, and as we'll discover later
Speaker 1: in the show, of questionable legality as well. And it's
Speaker 1: something that happens here in the world of startups a
Speaker 1: lot more often than you think. This has been public
Speaker 1: companies when we're on Wall Street, we would all have
Speaker 1: gone to jail. Right. The level of sort of just
Speaker 1: generalized lying, backstabbing, total conflict of interest and spilling of
Speaker 1: secrets is just rife in Selicon Valley, and it's just
Speaker 1: kind of the way it is. Hi, this is brad
Speaker 1: Stone and this is Ellen Hewitt, and this week Undecrypted,
Speaker 1: we're bringing you confessions of one startup founder who lie
Speaker 1: this away and they're raising money from investors and how
Speaker 1: he got away with it. But there's a little bit
Speaker 1: of a dirty secret to the way these young startup
Speaker 1: founders work and get funded in the valley. No matter
Speaker 1: how many charts and spreadsheets you see, a lot of
Speaker 1: these numbers are kind of made up, and how could
Speaker 1: they not be made up? And these are brand new
Speaker 1: businesses creating things that have never existed before. You can't
Speaker 1: count on the normal rules of commerce and decency and
Speaker 1: transparency to apply here. If you're thinking about going into
Speaker 1: angel investing, consider yourself warned. So let's go back to
Speaker 1: this moment. In two thousand ten, Antonio was sitting in
Speaker 1: front of his spreadsheet trying to get a handle on
Speaker 1: what the next year or two was going to look like.
Speaker 1: So he's looking at his Excel and on one side
Speaker 1: he has the cash that expects to raise, as well
Speaker 1: as the revenue that he expects there soon to launch
Speaker 1: service to start to bring in and plout it. Against that,
Speaker 1: he has all the company's costs and salaries to office rent,
Speaker 1: to these very expensive fees that he was gonna have
Speaker 1: to pay his lawyers to fight this lawsuit, and it
Speaker 1: shows something pretty dire that the company is going to
Speaker 1: run out of money in less than a year. Antonio
Speaker 1: published a best selling book called Chaos Monkeys that came
Speaker 1: out a few months ago, and in the book he
Speaker 1: has a passage which describes what he did next, and
Speaker 1: we actually had him read that to us. I didn't
Speaker 1: show the projections to the boys, I my my co founders,
Speaker 1: it would just depress them pointlessly. I also didn't share
Speaker 1: it with investors. Ag Rock was dead on arrival if
Speaker 1: this got out, so I lied. I diminished the cost
Speaker 1: of the lawsuit too far below the Undertaker's projections. The
Speaker 1: Undertaker is the sort of grim looking litigator that we
Speaker 1: had managed to cajole into defending us. Meanwhile, moving our
Speaker 1: projected launch date forward to next month to generate revenues
Speaker 1: immediately and impossibility given all the changes the boys were
Speaker 1: making to the product. Then I jacked up the growth
Speaker 1: rate to an unconscionable amount. It was outright chicanery, cooking
Speaker 1: the books in the worst form. But it's either that
Speaker 1: or give up now, and surrender was unthinkable. I still
Speaker 1: can't believe the investors believe my numbers, but they did.
Speaker 1: I mean, we're raising money for the sake of basically
Speaker 1: continuing the company, but also defending ourselves with other people's
Speaker 1: money effectively, and I love that. It's called the death clock.
Speaker 1: Which I think. I mean that you called the spreadsheet
Speaker 1: the death clock because it puts into perspective like what's
Speaker 1: at stake, which is this or nothing? I mean, you
Speaker 1: have no no choice but to try to do what
Speaker 1: you could make it happen. And that's the name of
Speaker 1: the startup game. Is that learning the game faster than
Speaker 1: you burn money? And that is that is the day
Speaker 1: I'd say in the death clock, it was literally just
Speaker 1: a spreadsheet and it had all our top line items,
Speaker 1: which is basically servers, rent and humans. That was it
Speaker 1: um against you know, a cash pile, and we plotted
Speaker 1: on a graph and I have a metaphor in there
Speaker 1: that it kind of looked like one of those infographics
Speaker 1: you see with any plane crash, like the planes going
Speaker 1: okay and then suddenly something happens and then boom you
Speaker 1: have like a smoking crater in the ground. Can you
Speaker 1: think back to that time and think about what how
Speaker 1: did it feel to cook the books? I mean, what
Speaker 1: what was going on in your head when you when
Speaker 1: you change these numbers the things you knew were untrue
Speaker 1: and not even remotely possible. I mean, I think this
Speaker 1: is how moral rationalizing happens. And I think it's fairly
Speaker 1: common um. And I applied the same, you know, rational
Speaker 1: calculus later when I was considering deceiving my co founders
Speaker 1: to go to Facebook instead of Twitter. It's for the
Speaker 1: greater good, right, Like everything, the world will be just
Speaker 1: be better if we perpetrate this sort of not so
Speaker 1: minor lie and get the company funded and continue. And
Speaker 1: it turns out I was right. The investors ended up
Speaker 1: making money, right. They ended up doubling their money in
Speaker 1: six months. So even though investors were fed these complete
Speaker 1: fabrications about the future of ad Rock, they still ended
Speaker 1: up making a profit, right. And most of that is
Speaker 1: things only to Twitter, which decided to buy ad Rock
Speaker 1: about six months after the seed rout we're talking about.
Speaker 1: If anyone was going to be upset about being lied to,
Speaker 1: it would be a guy named Russ Siegelman. Russ was
Speaker 1: a longtime venture capitalist at Kleiner Perkins. He was an
Speaker 1: angel investor. He was really the biggest backer of ad Rock,
Speaker 1: And I called him after the book came out and
Speaker 1: asked him how he felt about being lied to. And
Speaker 1: here's what he said, Well, I certainly don't approve of
Speaker 1: submitting projections to investors or anybody that you don't believe in.
Speaker 1: I don't know. I mean, it's not only dishonest, but
Speaker 1: it's it's it's just not it's it's not good business practice.
Speaker 1: But to be honest with you, the reason I don't
Speaker 1: react to strongly to it is because I don't believe
Speaker 1: anybody can project with any level of faith, accuracy or correctness, uh,
Speaker 1: your revenues when you're at the seed stage. So you know,
Speaker 1: I frankly couldn't have even I probably would never have
Speaker 1: even noticed that the growth rate was unconsfortably high quote unquote,
Speaker 1: because I wouldn't have even looked at it. It's funny
Speaker 1: because he asked me for that projection. Do you think
Speaker 1: he just wanted to give the impression of reading it
Speaker 1: or I think that the big hang up there was
Speaker 1: that he no one wants to put money into a
Speaker 1: sinking ship, right, And I thought of putting money into
Speaker 1: a company that's fighting its way to have lawsuit. And
Speaker 1: he felt he was subsidizing Fenwick because I would literally
Speaker 1: take money from one rich guy and give it to
Speaker 1: another rich guy called a lawyer, and we would just
Speaker 1: be the middleman. He didn't want that to happen Fenwick,
Speaker 1: by the way, is the law firm that Antonio hired
Speaker 1: to defend him in the lawsuit. And so I could
Speaker 1: only convince Rest to invest after Fenwick basically a great
Speaker 1: loanus the money. And so you know it's possible that
Speaker 1: it was you know, it was someone in my head
Speaker 1: and he didn't even look at the projections. Maybe it's
Speaker 1: interesting because he he is a savvy investor. In Krissock,
Speaker 1: it was a savvy investor, and and so it wouldn't
Speaker 1: surprise me if for very early companies, you know, projections
Speaker 1: are projections, and they don't they don't look at it,
Speaker 1: and they're they're evaluating a company more on the quality
Speaker 1: of the team and the quality of the idea. Right now,
Speaker 1: I think they are canny investors, right And I remember
Speaker 1: one investor I won't name, we immediately excluded because you
Speaker 1: asked me for a yeah business plan and a cash
Speaker 1: flight projection has like the first question he asked and
Speaker 1: I never got it to him, and it just it
Speaker 1: felt like a very j V movement. And you're absolutely
Speaker 1: right there. I think at that stage what you invest
Speaker 1: is in the team, not some spreadsheet. So the question
Speaker 1: I think that interests us is you know how how
Speaker 1: widespread then is as as you describe it, outright chicanery?
Speaker 1: Is it? Is it? Is it seed stage startups? Or
Speaker 1: does it expand beyond that? Could we see a late
Speaker 1: stage company, uh, you know that's not yet public, that
Speaker 1: has that same sense of desperation the spotlight is on them,
Speaker 1: you know, resort to fudging the numbers? I think a
Speaker 1: little bit harder um um. Like a piece of advice
Speaker 1: I think I got from Russ actually was at the beginning,
Speaker 1: it's easy to sell the dream right before you've actually launched,
Speaker 1: because you can tell the story and no one cares
Speaker 1: about the numbers. But after the dream has sort of launched,
Speaker 1: at some point you have to provide numbers, and maybe
Speaker 1: even audited numbers. And so I think if you ask me,
Speaker 1: is there is it common to have outright fraud at
Speaker 1: large companies just to name names, Not that I know anything,
Speaker 1: but like an ubern Airbnb, I think no, there isn't
Speaker 1: sort of widespread fraud. Yeah they're being Yeah, there's no
Speaker 1: way you'd get away with with that. What what I
Speaker 1: did at that level just absolutely I can't imagine that's
Speaker 1: that would happen. The reason why this is all funny
Speaker 1: money and funny numbers is because not to get too wonky,
Speaker 1: the evaluations we're talking about are the theoretical valuation of
Speaker 1: the company if the company were to raise another round
Speaker 1: and there were these these people are buying their lending
Speaker 1: you money on the terms that hey, when you actually
Speaker 1: raise money, this is how much I paid per share,
Speaker 1: which is less than later investors, and that's that number is.
Speaker 1: So it's an input to a theoretical calculation. It sounds
Speaker 1: a little bit that it has a little whiff of
Speaker 1: pyramid scheme to it. No, No, it absolutely is. Yeah, No,
Speaker 1: it does, it does. Just to be sure, I called
Speaker 1: up an expert on startups, Rob Siegel, not to be
Speaker 1: confused with Russ Siegelman, who we just talked to. Rob
Speaker 1: Siegel teaches at Stanford Business School, and he said that
Speaker 1: it's true that startups give investors optimistic protections all the time.
Speaker 1: When an entrepreneur at the seed level walks in, every
Speaker 1: sophisticated investor knows that the forecast is wrong. What you're
Speaker 1: looking for is the thought logic that goes into not
Speaker 1: the tops down. The market is worth six trillion dollars
Speaker 1: and we're going to capture five percent of it. But
Speaker 1: how many units of whatever good or service are you
Speaker 1: going to sell? And how much are people going to pay?
Speaker 1: And how many people are out there that might buy it?
Speaker 1: And what's the logic that's gone into that forecast? Are
Speaker 1: any customers using it already and are they paying a
Speaker 1: company any money? The forecast, by definition are going to
Speaker 1: be wrong. It's impossible to know the future exactly, especially
Speaker 1: at the seed stage. So institutional investors know that when
Speaker 1: something comes in, it's probably aggressive, it's probably uh, slightly overstated.
Speaker 1: You hope it's not over lying, but you know, if
Speaker 1: somebody's being aggressive, is their logic behind the expected ramp
Speaker 1: and forecast? That's completely common and normal. But Rob said
Speaker 1: that even in a world where Rosie projections are the norm,
Speaker 1: he thinks Antonio crossed the line. So to Russ his
Speaker 1: point that he knows that the forecast don't make sense.
Speaker 1: I think all vcs and all institutional investors and all
Speaker 1: sophisticated angels know that the forecast is going to be wrong.
Speaker 1: The question is that they're good logic behind it. The
Speaker 1: point about whether or not this is legal that's more
Speaker 1: worrisome in this particular example because if an entrepreneur is
Speaker 1: knowingly lying, knowing the line that revenues will not commit
Speaker 1: at a certain time, knowing the line that the growth
Speaker 1: rate is impossible as opposed to aggressive, you know, um
Speaker 1: is purposefully cutting down the costs of the expected lawsuit
Speaker 1: because the entrepreneur knows it's going to be much higher,
Speaker 1: but is knowingly you know, dividing by two. That's where
Speaker 1: you get into, you know, potential legal complications because you
Speaker 1: are actually misleading investors. You're knowingly misleading in investors. So, Ellen,
Speaker 1: you reviewed Chaos Monkeys for Business Week. We talked to Antonio.
Speaker 1: Did this episode make you more cynical about Silicon Valley?
Speaker 1: You know, I think as a startup reporter covering Silicon Valley,
Speaker 1: I get the impression that people lied to me all
Speaker 1: the time, but I'm never sure. So reading someone talking
Speaker 1: so baldly about it, uh, definitely made me a little
Speaker 1: bit more cynical about it. It It made that part of
Speaker 1: me that thinks people aren't really honest about the month
Speaker 1: or a month growth. That part of me is smaller now.
Speaker 1: I guess I'm more inclined to give them the benefit
Speaker 1: of the doubt. I mean, I guess I feel like
Speaker 1: no one here knows what's around the corner. Everyone's just
Speaker 1: trying to do their best impression of being confident about
Speaker 1: all these changes, and at least the savvy investors are
Speaker 1: going to take any projections with a grain assault. And
Speaker 1: I feel maybe Antonio was grandstanding a little bit and
Speaker 1: describing what was really typical uncertainty as a sort of
Speaker 1: outright falsehood. And another wrinkle is as Silicon valiant and
Speaker 1: startups become more popular and people see these huge gains
Speaker 1: coming out of it, I think we're gonna see a
Speaker 1: lot more people outside of the traditional investors. We're talking celebrities,
Speaker 1: other people of high net worth interested in investing in
Speaker 1: early stage startups, kind of like Antonio's. And I just
Speaker 1: wonder if it means that we should be hoping that
Speaker 1: they get more fair information. They don't have the same
Speaker 1: savvy that Rusta. They haven't been doing this for thirty
Speaker 1: That's a good point, right, do do Britney Spears and
Speaker 1: her agent know that that? And Antonio Garcia Martinez may
Speaker 1: be making up as numbers should probably not, maybe after
Speaker 1: you've written this book. This is a mooch question, But
Speaker 1: if you were to make a new startup today and
Speaker 1: you and you ended up in a position like this again,
Speaker 1: death clock, would you lie? Oh yeah, yeah, I think yeah, yeah,
Speaker 1: definitely it's for the great because because when you're in
Speaker 1: the ship, you do everything to save the ship. It
Speaker 1: just doesn't matter. That's the way it works, right, I
Speaker 1: mean why Combinator was still relatively new back in two
Speaker 1: thou ten. Do you think that there are more checks
Speaker 1: and balances that exist in those programs and other other
Speaker 1: incubators to ensure that there's a level of honesty in
Speaker 1: the dialogue between investors and entrepreneurs. No, No, I don't
Speaker 1: think so. I mean the real is that it's never
Speaker 1: lying right like, it's never outright fraud like Obviously I'm
Speaker 1: a little hyperbolic in the book, right I've I've I've
Speaker 1: personally seen very few cases of like fraud like we
Speaker 1: claimed we had a hundred million top line. In fact
Speaker 1: it was nothing like. I've never seen that before. But
Speaker 1: you could definitely there's all sort of ways you can
Speaker 1: lie with statistics and with figures that would impress um,
Speaker 1: that would impress and and yse startups. I think maybe
Speaker 1: unfairly our character are in the sleeve are famous for
Speaker 1: their up into the right graphs and which they rescuyle
Speaker 1: the y exist always make look make it look amazing
Speaker 1: on demo day, right, And so you know, stuff like
Speaker 1: that I think is pretty common, and I think it's
Speaker 1: still happened, and there us as point investors are probably
Speaker 1: savvy to it and they know they know it. The
Speaker 1: better questions why do we even go through the arade? Right?
Speaker 1: But I don't know. Actually that's a good question. Well,
Speaker 1: and so when when we saw us as answer, which
Speaker 1: which came in um uh pretty you know, pretty soon
Speaker 1: just before we talk to you, it made me think, um,
Speaker 1: you know, Russ has been doing this for decades. He
Speaker 1: knows what's up. If you continue to see I think
Speaker 1: a trend of more people and we're talking like celebrities
Speaker 1: or other rich people with with cash who want to
Speaker 1: get in on startups and and seeing investing is very
Speaker 1: um attractive to them. Do you think that changes the
Speaker 1: moral calculus at all? Like is there more of a
Speaker 1: responsibility to be up front? You'd like to think so,
Speaker 1: but not really. It's like the battlefield and there's like
Speaker 1: no women and children out there, right, and like if
Speaker 1: you show up and you're you know, it's like the
Speaker 1: old drug about like we're sitting at the poker table
Speaker 1: and you you don't know who the sucker is. Then it's
Speaker 1: you right then, like you know still can value still
Speaker 1: that way? There it is, And that's it for this
Speaker 1: week's episode of Decrypted. Thanks for listening. We're a brand
Speaker 1: new show and we'd love your help in spreading the word.
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Speaker 1: at at Bradstone and I'm on Twitter at Ellen Hewitt.
Speaker 1: This episode was produced by Magnus Hendrickson and Liz Smith
Speaker 1: and aki Ito. Aaron Black assisted with recording Alec McCabe
Speaker 1: as head of Bloomberg Podcast. We'll see you next week.