How to scam investors — 4 easy steps.
Lessons learned from founders of WeWork, Theranos, Wirecard and Nikola
“They were careless people … they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made.”
The Great Gatsby
F. Scott Fitzgerald
WeWork — Adam Neumann
Investors: Benchmark, SoftBank Vision Fund, Goldman Sachs
Peak Valuation: $47 billion in 2019
Total Funding: $20.6 billion
Theranos — Elizabeth Holmes
Investors: Rupert Murdoch, Tim Draper, Larry Ellison; Draper Fisher Jurvetson, ATA Ventures, Fortress Investment Group
Peak Valuation: $9 billion in 2014
Total Funding: $1.1 billion
Nikola — Trevor Milton
Investors: Fidelity Management, ValueAct Spring Fund
Peak Valuation: $34 billion in 2020
Total Funding: $2.5 billion
Wirecard — Markus Braun
Investors: Softbank
Peak Valuation: €27 billion in 2018
Total Funding: $1 billion
What all these founders have in common — beyond greed, narcissism and sociopathy — they were great actors that could present to investors charismatic characters with a bright vision of the future. They created perceived competition and FOMO among investors, convincing them to take fast growth and social proof as reliable evidence of business success, instead of looking at fundamental metrics (effectively labeling such inquiries into fundamentals as “pessimistic,” “risk averse” and “un-Silicon Valley”)
There is a lot to learn here for founders and investors alike.
Step 1.
Turn up your charisma game (project an image of a “cool” and strong leader):
Elizabeth Holmes was lazer focused on projecting an image — she wore almost exclusively the same outfit every day— black jacket, black Issey Miyake mock turtleneck, black slacks with a wide, pale pinstripe; and black low-heel shoes — this seemed to be the closest approximation to a female Steve Jobs. In a Glamour magazine article she claimed to have 150 black turtlenecks in her wardrobe. Holmes also worked on lowering her voice to a deep baritone and effectuate a California accent, although reportedly this slipped sometimes into her real voice when she was drinking. She allegedly also practiced deep-eye contact to enhance trust and attention, with some employees claiming that they never actually saw her blink.
Adman Neumann was a 195 cm tall attractive ex-model with long wavy hair. He would wear black designer leather jackets, skateboard to work and look/act like a rock star. He would push investors and business contacts to take Don Julio 1942 shots with him at all times of day and would smoke marijuana with the trusted insiders doing deals or flying on private jets to fun outings. Neumann’s staff already regarded him the “craziest person” they knew. However the drinking, marijuana and other craziness was still not enough for his investor Masayoshi Son of Soft Bank who told Neumann that he wasn’t crazy enough, that “crazy would always beat smart.”
Braun also liked to channel the Steve Jobs vibe with his daily go-to outfit — black turtleneck and black blazer, and his regular cup of peppermint tea. His mannerism, vocabulary and presentation style all signalled that “Doktor Braun” was the Austrian version of Jobs. His protege and business partner Marsalek played the “chaotic genius.” He would come to meetings with his copy of Sun-Tzu’s The Art of War and not say anything. He only flew in private jets, dressed in ultra exclusive suits, had the most expensive watches and solid gold credit card.
Milton usually modeled the Elon Musk look with his blue blazer with an open collar dress shirt. His public appearances were also Elonesque, with presentations exuding simple but overwhelming positivism.
These founders played their roles perfectly. Actors communicate the details of their characters’ personality to the audience through costumes and affectations, this helps actors transform into recognizable, desirable and believable characters for the audience. All these founders were able to create an image in the minds of investors that channeled a sense of strong charismatic leaders and icons of their industry.
Step 2.
Pitch a strong future vision (promise big changes in a big market):
Neumann pitched a new real estate paradigm — real estate services as a “platform” or “operating system”— offices (WeWork), apartments (WeLive), schools (WeGrow), gyms, and food would all be supplied as services by WeWorks. He also sold investors on the idea of the dystopian “data play” where marketers will pay for the behavioral data that WeWork will have from tracking how their customers work, shop, learn, eat and sleep. When asked why people invested so much money in his real estate company versus many other real estate projects, Neumann’s answer — “My story, its far better than theirs.”
Holmes was selling the vision of a personal health “platform” — where everyone will be able to diagnose their own their diseases, fast and cheap, just from a small drop of blood using her Edison diagnostic devices. This would herald a new age on home self-diagnosis.
Milton was pitching the new transportation “platform” offering futuristic hydrogen/electric powered trucks and fueling services on a subscription basis. He also claimed to in multiple interviews to have succeeded at “cutting the cost of hydrogen [production] by ~81%” compared to anyone else in the world.
Braun promised a universal seamless, safe and instant digital banking and finance “platform” that would work online and offline across the world. Braun claimed to have a super sophisticated AI/ML system that would cut fraud and merchant charge-backs by 50% and make traditional paper money obsolete.
All of these founders were able to get the investors to buy into the big vision and big opportunity. They made it seem that focusing today on the actual details of of this future business model would be premature, petty and trivial. Bill Gurley wrote a blog post about why big vision pitch decks rule. His top reason was the “importance of narrative.” “Investors are not solely evaluating your company’s story,” he said. “They are also evaluating your ability to convey that story.”
“Misdirection” is a form of theatrical magic, where the performer draws audience attention to one thing to distract it from another. For startups the “big vision” can be a powerful tool of deception against investor inquiries regarding the details of how their idea actually makes money. For investors the big vision/market pushes all of the right buttons by teasing the massive scale of future profits.
Step 3.
Create and display “social proof” (perceived evidence of support for your startup):
From the start Neumann relied on support from wealthy members of his Jewish Kabbalah congregation, wealthy families, celebrities and investors. It did not hurt that his girlfriend Rachel Paltrow (the cousin of Gwyneth Paltrow) was able to get more celebrity support for the project. Support from celebrity business people like Jared Kushner and Ivanka Trump encouraged others to believe in the WeWork story.
To attract professional investors, Adam pitched a utopian vision of the future office— a “capitalist kibbutz” — and as Benchmark partner Bruce Dunlevie concluded after visiting the WeWork spaces — Adam was “selling sex” not real estate. To help this image, Adam launched the “Activate the Space” program — WeWork staff would be put at the empty desks to pretend to be tenants, they would get money to throw instant parties with free food and drinks, and were directed to always play The Notorious B.I.G. song “Juicy” when Adam walked in with the investors during a building tour to “show that WeWork was bursting with life and energy.”
Holmes was also ingenious at getting celebrities to vouch for her and her non-existent medical technology. It did not hurt that she had bought a $9M mansion in Atherton, Calif., favorite area for elite Silicon Valley investors, and was thus able to raise money from her neighbors. She boldly used the mentorship and credibility of tech industry leaders like Oracle co-founder Larry Ellison, and Don Lucas, a veteran Valley VC, to raise money from other investors. At a Silicon Valley gala hosted by Yuri Milner, she got Millner to introduce her to Rupert Murdoch, and her Series A fundraising round quickly followed after Rupert Murdoch made his angel investment.
To bolster her credibility she put together a Theranos supervisory board that included two former United States Secretaries of Defense (Perry and Mattis), two former United States Secretaries of State (Kissinger and Shultz), former CEO of Wells Fargo (Kovacevich), and former director of the Centers for Disease Control and Prevention (Foege). It is no wonder that people believed her lies about the diagnostic system or that US Army troops were already using it in Afghanistan.
To convince the visiting investors and partners that her Edison devices actually existed, Theranos bought outside lab equipment via a secret shell company and ran “fake demonstration tests.” The machines were run in demo settings (in “null protocol” so that no analysis or diagnosis is actually being done), or recordings of prior successful tests would be shown as if these were live results. Scientists were presented fake reports from major pharmaceutical companies like Pfizer and Schering-Plough (although it is notable that the Shering-Plough company name of was misspelled in the documents).
Initial investors in Nikola came from Milton’s Mormon church peers. To make his grandiose claims more believable, Milton hired Mark Russel — CEO of Worthington Industries (MYSE: WOR) to be Nikolas President. Milton was also signalling trustworthiness by frequently referring to his supporters Jeff Ubben, the founder of activist hedge fund ValueAct, and GM executive Steve Girsky. To further lend credibility to Milton’s highly optimistic claims to investors about Nikola truck capabilities, Milton put on glitzy demo events for media and industry guests.
Nikola trucks were shown with equipment powered on and were presented as “fully functional” while in reality they were powered by hidden power cables that ran through the stage. To prove that the semi-trucks were “real” Milton also produced demo videos with the trucks “driving,” but behind the scenes the trucks were actually towed into position and then rolled down hills using gravity, while the doors were taped on to keep them from falling off and batteries removed to prevent fires or explosions.
The fact that Ernst & Young regularly audited and approved Wirecard finances and annual reports gave investors the proof” that this business was on the level. Perversely, the fact that Wirecard was investigated by the German financial market regulator BaFin in 2008 and 2017 without sanctions or charges created additional social proof that the business was legitimate. In fact regulators suspended short selling of Wirecard stock to safeguard “the integrity of financial markets,” and instead of further investigating Wirecard they started investigating Financial Times for “market manipulation.”
All of these startup founders relied on building up a veneer of social proof to build customer confidence and drive growth. They insinuated themselves into the “right” circles, neighborhoods and churches, and then started flipping supporters/references ever higher to get to “validation” by trusted household names. Social proof, such as celebrity support, approval by industry insiders and experts, and glowing partner testimonials are a powerful tool in the hands of a manipulator. On the surface this is strong evidence of the viability and veracity of the project.
Step 4.
Create FOMO (manufacture a sense of urgency and artificial scarcity):
WeWork was able to get investors very excited by showing massive growth numbers and even more colossal future projections. Using 1 and 2 year free rent offers to tenants, enormous demand estimations, above market rent estimates, new business models/revenues to be launched in the future, and various accounting tricks (“Community Adjusted EBITDA” etc) — it looked like WeWork was on a phenomenal growth and profitability trajectory. This hockey stick projection got investors very excited and Neumann was not shy about letting investors know that they have competition from their peers. To turn up the heat further, he hinted that the company valuation will shortly be going up if the investors do not lock up the investment immediately. Social proof backed by hyper-speed growth numbers this becomes a credible threat for investors.
Holmes also created competition among the investors to seal the deals. Once she had multiple competing investors, she could start dictating terms of the deals (length and scope of due diligence, deadlines for when the investment must be completed, etc). She used the same technique with clients, telling Walgreens executives that three pharmaceutical companies — including Pfizer and Schering-Plough — had already visited her facilities and completed due diligence on her diagnostic technology. She convinced these clients that vetting by other industry players and experts was more than enough to move on to signing deals.
In 2016, two years after launch, Milton already claimed that Nikola had received $2.3 Billion in pre-sales of its semi-trucks. By 2019 Milton claimed that total pre-orders for trucks reached $14 billion, and included the likes of Anheuser-Busch. As investors were seeing Tesla valuation skyrocketing, and other investors circling, Nikola seemed like a deal they had to get in on or miss out on the outsized returns.
In a market where investors were desperately for the next-big-thing
Braun was able to create an image of the most successful European Fintech, and that investors would be lucky to get aboard this rocketship. The porn on online gambling revenues were labeled “emotional” services, making it appear that there were billions in legitimate transactions and financial revenues. They further obfuscated payment jurisdictions with mirror companies and various M&A transactions to legitimize their business portfolio and avoid high risk categorization. Using these and other tricks By 2014 Wirecard was able to show investors transaction volumes of €34.3 Billion and revenues of €601 million in “Consumer Goods,” “Travel & Mobility” and “Digital Goods.” This looked very attractive to SoftBank and other investors. In 2019 Softbank determined that Wirecard was undervalued and invested $1 billion through a convertible bond from the Vision Fund for 5.6% of Wirecard. SoftBank Group’s compliance team reviewed the “due diligence and found it was ’rigorous and substantive.’
According to Dan Davies the author of Lying for Money “the way in which most white-collar crime works is by manipulating institutional psychology.” This is not news to investors. Bill Gurley of Benchmark (investor in both WeWork and Uber) appropriately warned in his 2015 blog post that investors “desperately afraid of missing out on acquiring shareholding positions in possible ’unicorn’ companies, have essentially abandoned their traditional risk analysis.” Andreessen Horowitz and Sam Altman, also both warned startups to stop making “financial misstatements.”
Nevertheless, if you’re a hot startup where everyone wants to invest in (or it appears so), the founder has the leverage and luxury of prioritising those investors that are willing to take more risk, scale-back the due diligence process, and shorten the investment process to “pre-empt” their competitors. FOMO allowed these founders to escape the standard due diligence processes and normal scrutiny that would have killed investments into WeWork, Theranos, Wirecard, Nikola and most other financial scams.
Step 5 (optional)
If you get caught — blame everything on your hustler culture
When investors catch founders embellishing the truth, the usual response is that they have a hustler culture of “fake it til you make it.” This is often followed by an explanation of how you have to be efficient and “sell it before you build it.” Most will emphasize that have the “grit” to get through the challenges and naysayers and that it is natural to have problems when you “move fast and break things.”
While sometimes legitimate startups really do believe they are doing the right thing with very limited resources, this is appropriate for Pre-Seed and Seed stages when the starup has not reached product-market fit. Series A on these head-fakes have given fraudsters many additional years and billions of additional financing to keep their scams going.
Investors should follow the old Russian saying favored by Ronald Reagan — “Trust, but verify.”
Other “Vapourware” startup stories like those above: Juul, LightSail Energy, Fab, NS8, Luckin Coffee, etc. etc.
If you want to learn more about these founders and startups, I recommend the following reading:
The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion
by Eliot Brown
Bad Blood: Secrets and Lies in a Silicon Valley Startup
by John Carreyrou
Money Men: A Hot Startup, A Billion Dollar Fraud, A Fight for the Truth by Dan McCrum
Hindenburg Research — Nikola Report — Published on 10 September 2020
Zatarra Research — Wirecard Report — Published on 3 July 2020
For extra credit, also read about other masters of manipulation:
Steve Jobs by Walter Isaacson
Super Pumped: The Battle for Uber by Mike Isaac
Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World by Tom Wright
