There’s almost always an element of “fake it ’till you make it” for a successful, disruptive startup. Some companies just push their luck a little too far. There are lessons here for anyone raising money from investors.
1. Theranos Raised $1.1 billion
Theranos claimed to have developed a proprietary blood testing technology, the problem was that the proprietary technology was completely fictitious. Theranos falsified test results, misled partners, released devices that did not work as promised, and repeatedly denied accusations of wrongdoing in media appearances. The SEC investigated and the executives were charged with wire fraud.
2. Zenefits Raised $584 million
Zenefits’ brokers artificially inflated the number of hours logged in the state’s health insurance broker pre-certification program by using a tool known as “the Macro,” written by Zenefits CEO. So, up to 80% of insurance plans were sold illegally by unlicensed brokers. In 2017, the CEO settled with the SEC and agreed to pay penalties interest, and fines.
3. The Honest Company Raised $490 million.
The Honest Company claimed that their goods were free of synthetic chemicals. However, all its products contained synthetic chemicals, some toxic. The company paid $7.3M to settle the class-action suit.
4. Outcome Health Raised $500 million
Outcome offers pharmaceutical companies advertising on TVs and tablets that the company distributed free to 40,000 clinicians’ offices across the US. However, they used “fraudulent and false information” selling advertising for more screens than the company possessed. The company settled lawsuits by the company’s investors and the executives stepped down.
5. Mozido Raised $314 million
Mozido was valued at $2.3B. The company was to develop financial products for the 2B people around the world who access mobile technology but lack a traditional bank account. The SEC claimed the founder had defrauded investors of $55M, and used shell companies to divert funds from investors to his personal accounts. He faces 20 years in prison.
6. Hampton Creek Raised $240M
The vegan food products manufacturer was accused of falsifying sales data by secretly buying their products from US supermarkets, showing the product much more popular than it actually was. In addition, contractors contacted supermarkets by phone inquiring about Hampton Creek products to create the illusion of strong consumer support. Hampton Creek rebranded to Just in June 2017.
7. Rothenberg Ventures Raised $50 million
The company funded seed-stage tech startups. Having invested in Elon Musk’s SpaceX and others, they gained investors confidence. Rothenberg, hosted lavish parties, used investor money for his very extravagant lifestyle. The SEC alleged he spent $7M of investors’ money on his personal lifestyle . Rothenberg stepped down in 2018.
8. Skully Raised $13 million
The Skully motorcycle helmet would use AR to provide with a digital about road hazards, weather, and driving conditions, as well as a 180-degree blind-spot camera. Allegedly the two founders spent the money on lavish purchases, including rent on luxury apartment in SFO, two Dodge Viper cars, four motorcycles, limousines and entertainment. The Skully AR helmet never saw the light of day.
9. Bouxtie Raised $2.5M
Bouxtie offered personalized digital gift cards with custom messages and graphics. But they had engaged in elaborate deceptions to attract investors. They falsified signatures on checks to create the impression that a public corporation was looking to acquire them. They also forged multiple signatures to acquire a “loan” from a Las Vegas company. The founder was sentenced to 3 years jail.
10. Crescent Ridge Capital Partners Raised $7.5 million
The company defrauded more than 50 clients by encouraging them to invest in the hedge fund. They told investors they managed tens of millions of dollars for their clients, and routinely exceeded the S&P 500’s expectations. In reality, the founder had zero experience managing a hedge fund, had a long history of losing money in the securities market, and used investors’ money to finance his lavish personal lifestyle. He pled guilty to charges of wire fraud and was sentenced to 10 years in prison.
What is the definition of a successful startup founder? Someone who has a loophole named after him.