cancelled
the fraudulent finales of millennial founders
Car salesman: *slaps roof of business idea*
“This bad boy can fit so many terrible decisions in it.”
Business fraud and failure cases feel like a dime a dozen these days. They grace the front pages and seem to attract more attention than even the second and third largest bank failures in American history. Despite the nicheness and relative obscurity of their industries, the downfall of Frank and the impending petering out of Nikola, for example, have been major social talking points in the days after news broke.
Then there are the big cases — the ones that inspire social and psychological commentary, limited-run podcasts, and Netflix documentaries. Headlines about trendy millennial startup ventures collapsing from within after their borderline (or actually) fraudulent marketing claims come to light have become nearly constant in recent years, leading one to wonder whether they share anything in common.
There’s a name for people obsessed with real-life horror stories (true-crime fans), a name for people who are obsessed with gross childhood stories (Redditors), and even a name for people who watch other people’s lives falling apart to feel better about themselves (reality TV fans); but there isn’t a name for people intensely fascinated with financial fraud cases. And it’s a shame, because these writers would embody that moniker. Charismatic founders with wild ideas and fuck-you money being publicly brought down are our bread and butter, and we’re ready to admit it. But we can’t help but notice that many, if not most, of these disgraced founders have been millennials. Is this a trend, or just an embodiment of millennials getting to the age where they actually have some influence in the world (including the power to screw up royally)? Let’s find out.
Some of the biggest cases of the past decade have revolved around a founder born before the turn of the century who was in the right place at the right time: technology was the next big thing, and with it came the big ideas and convincing sales pitches that only twenty-something dropouts from Harvard and Stanford could give. And the sales pitches certainly came: an elite celebrity-filled music festival on a private Bahamian island; beautiful co-working spaces with beer taps and wild campus parties; fast and convenient blood tests requiring only a finger prick of blood; and a legitimate exchange platform for the powerful new monetary unit that promised to take over the world. They came in every sector and appealed to consumers and investors looking for unique and exciting opportunities to improve their lives, make money, and have fun doing it.
These cases have been documented in pop culture and media so thoroughly that yet another lengthy explanation of their history is akin to plagiarism; instead, we’re going to give a brief summary and then look at what ties these stories and their subjects together to see if there really is a troubling trend of millennial fraudsters.
Let’s begin with Billy McFarland: he and his celebrity sidekick Ja Rule originally rose to fame (and infamy) with Magnises, the “millennial Black Card,” a club membership that promised access to exclusive perks at unbelievably low prices. While it did not crash and burn with the same media attention as Fyre (we’ll get to that), the company was retroactively described as its own kind of scam for failing to deliver on its promises to users — despite marketing which clearly aimed to draw parallels to Amex’s famously exclusive Centurion Card, Magnises was not even a functioning credit card, depending on existing Bank of America or Wells Fargo accounts to actually provide credit and process payments. Fyre Festival originated with an employee of Fyre Media (a booking platform for consumers to hire famous musicians for events) who came up with the idea of a concert for industry professionals to see what the company was all about. But McFarland, always one to jump on an idea, spun it into an aspirational Coachella-level music festival with ads featuring supermodels and jet skis on the idyllic shores of Pablo Escobar’s private island. After the flashy ads and celebrity Instagram posts resulted in a sold-out experience, they began actually developing this festival only months before its debut, dealing with challenges of liability coverage, lack of residences, and toilet and waste management infrastructure amid a growing balance sheet of expenses. To cut a long story short, it infamously crashed on the first day of festivities when attendees arrived in the Bahamas to find that they were meant to be living in leftover hurricane shelter tents erected on what was basically a construction site, among a host of other shocking letdowns considering the thousands they spent to attend the supposedly exclusive event.
McFarland himself appears on camera in documentaries and news reels as a sort of overgrown frat boy persona, a dreamer who doesn’t appear to have the business acumen to follow through on his ideas (though he’s certainly convincing enough to hide that fact for a long time as the money rolls in). While social media FOMO seems to have carried him to at least initial success, generating enough popularity and market demand to reel in investors who otherwise wouldn’t have taken him seriously, the house of cards collapsed in spectacular fashion during the Fyre Festival — Magnises also declared bankruptcy and disappeared in the aftermath, and McFarland served over four years in prison on fraud charges. He’s now out and planning a Broadway musical and a two-point-o rendition of the festival.
We’ll be sure to secure tickets to that hot mess.
Next is WeWork: founded in 2008 to capitalize on the Internet-enabled boom in working away from the office, the company pioneered the business of co-working spaces, essentially open-plan offices that remote workers who were tired of their apartments could use in exchange for a daily, monthly, or longer-term rate. Founders Adam Neumann and Miguel McKelvey, from Israel and Oregon respectively, had both grown up for at least part of their childhoods in communes — and they wanted to bring the same energy to the workplace as an antidote to cubicle-ism. But despite essentially being a real estate company that leased out offices, they wanted to operate (and grow) with the same vigor and vibes as a tech startup; they hosted elaborate parties and retreats, opened up apartments for office renters (cult much?), and pitched charismatic stories about “the future of work” to investors — and they bought it. After a series of investments from players like J.P. Morgan and SoftBank as their valuation climbed to ludicrously high levels, the company was forced to reckon with Neumann’s unethical business practices in advance of their planned IPO. For just a sample of his ineptitude: he sold the trademark for “We” to his own company for six million dollars of company stock, an arrangement that was unraveled in 2019 and pointed to as an example of questionable corporate governance.
Eventually, after weeks of bad press, the IPO was canned and Neumann was forced to step down; but WeWork never recovered its valuation, which dropped from its all-time high of $47 billion to under a billion dollars today. While the departure of Neumann (who faced no prosecution, we might add) lacks the spectacle of Billy McFarland’s federal charges, jail sentence, and restitution order, it still allowed the company to regain some stability and rise from being a laughingstock to being a forgotten bullet point in the annals of financial history. Neumann won people, especially investors, over with his charisma and big ideas (Masayoshi Son of SoftBank even encouraged Neumann to dream bigger at one point in time), but his inability to follow through on these ideas or realize their impracticability in the face of reality brought him down. As of today, Neumann is still wealthy and has recently announced his new real estate company Flow, which was backed by $350m from Andreessen Horowitz (a16z) — will they ever learn?
*deep breath* Anyway. I’m just glad I never heard back on my a16z job application.
Theranos is our next can of worms, and boy is it full of worms. Legendary founder Elizabeth Holmes, once proclaimed the first self-made female billionaire by Forbes, dropped out of Stanford to start the company in 2003 to mixed reactions from former professors. While she was an exceptionally talented, intelligent, and charismatic student, she was just a student at that time — perhaps the Dunning-Krueger effect is responsible for this whole debacle. Her idea was to create a blood-testing device that could run the gamut of necessary tests with only a finger prick of blood rather than a full vial, not only making it easier for people who underwent frequent testing, but also to empower everyone to learn more about their health status. The problem was, this wasn’t physically or medically possible (and if it was, it’s very likely that an established company would already have been on it). Holmes opened offices in Palo Alto, hired good people and poached some others, and convinced investors of the revolutionary nature of her idea with a combination of half-truths, embellishments, and straight-up lies (though when deposed about these facts by the Securities and Exchange Commission, she frequently “didn’t know,” “didn’t remember,” or “couldn’t recall” these details). In public, she was an inspiration, a visionary, the CEO of a Silicon Valley unicorn. But behind the scenes, there was a culture of fear, intimidation, and willful ignorance by Holmes and her COO and former boyfriend Ramesh “Sunny” Balwani. And their “proprietary” device, nicknamed The Edison, was never able to run more than twelve tests (and never at the speed, blood quantity, or accuracy that was promised in their marketing — there were even some devastatingly incorrect results that put people’s health in danger).
After a deal with Walgreens on fraudulent terms that injected some much-needed capital into the company, an explosive article in the Wall Street Journal by investigative reporter John Carreyrou began its unraveling. While Silicon Valley’s “fake it till you make it” culture worked out successfully for many, including Homles’s mentor Larry Ellison, medicine is a strict and stringent industry for a reason — you can’t just play games of chance when people’s lives are on the line. For that matter, Holmes recently reported to federal prison to begin her eleven year term for defrauding investors, while Balwani is in the process of appealing his thirteen year sentence. Theranos is dead in the water, and it’s unlikely that the money invested in the company will ever be recovered. Despite her reverence of iconic Apple founder Steve Jobs, Holmes will certainly not be remembered in the same way he is — and perhaps her lasting image will be in an orange jumpsuit instead of a black turtleneck.
We’ll just have to wait and see.
Lest you think that the trendy topic of cryptocurrency would be left out of this conversation, let us disabuse you of that notion: founded concurrently in 2017 by MIT graduate and League of Legends aficionado Sam Bankman-Fried, FTX and Alameda Research offered cryptocurrency trading and hedge fund services, promising spectacular returns on clients’ invested funds. Aside from some minor hiccups (Bankman-Fried was scolded by FDIC for falsely claiming to provide deposit insurance, and admitted that “Alameda Research” engaged in no research and was named in such a manner purely to attract venture capital interest), the operation appeared to run smoothly until September 2022, when Bloomberg began to report on the unusually close relationship between the two companies. Suspicions arose that the firms’ relationship — which would have been blocked by regulators in a non-cryptocurrency situation — was structured in a way that could lead Alameda to profit if the value of FTX clients’ cryptocurrency investments declined.
While FTX initially survived these revelations, the resulting suspicion was enough to convince major cryptocurrency investor Changpeng Zhao to sell his multi-billion dollar holdings of FTT, a coin developed by and associated with FTX. Due to the relatively low trading volume of FTT, this sale significantly decreased the token’s price. The ensuing crisis at Alameda Research revealed that the firm held a significant amount of its assets in FTT, and more concerningly, that these funds were those of FTX investors, loaned to Alameda by Bankman-Fried without investors’ knowledge or consent. Unable to pay back its fraudulent loans to Alameda, FTX suspended withdrawals and declared bankruptcy, leaving the fate of billions of dollars of investor funds hanging in the balance while awaiting legal proceedings. Bankman-Fried is currently under house arrest in his childhood home in California, and the aftermath of the collapse has not been kind to him: he admitted while unknowingly texting a Vox reporter that his work in the effective altruism movement, which aims to maximize the positive impact of charitable giving and is trendy among the nouveau riche of the tech industry, was “mostly a front,” and was revealed to often be playing League of Legends — and poorly, at that — during important Zoom meetings with investors.
Funny how quickly the quirks of a nerdy founder can become a retrospective red flag.
Now that we’ve reviewed ancient history (lol), let’s talk about what these founders had in common, and whether their millennial-ness had anything to do with their story. Every one of them, in the face of evidence contrary to their big inventive plans, ignored problems and pushed forward out of either ignorance or overconfidence. They managed to convince investors and participants (with lies, sure, but they still got away with it for a while) that their idea would be the greatest thing since sliced bread and would return their investment many-fold. Once big names got involved, employees and outsiders who had doubts about the venture were bound to second-guess themselves and their criticisms: if BigName McMoneyBags believes in this, who am I to dissent? But while we might expect that those famous investors with credibility are at a level of intelligence far beyond the average person, able to analyze the merit of a company and only invest if it makes sense, they very often rely on their own instinct; perhaps they are right more often than they are wrong, but the risk is always present — and sometimes the coin toss doesn’t go their way. If that wasn’t enough to maintain public belief in these companies, the founders certainly had the charisma to carry it home; it wasn’t always the same sort of charisma, mind you. Billy McFarland had his adolescent white-boy charm and an air of serial entrepreneurism; Adam Neumann had a hippy-esque accented suaveness with a proclivity for turning a boring business into a flashy enterprise; Elizabeth Holmes had a deep, manufactured voice that seemed to betray a serious business acumen alongside a feminine authenticity that engrossed you in her vision; and Sam Bankman-Fried had the careless demeanor of a classic tech nerd who one could defer to in matters of discernment and understanding. When you don’t know what you don’t know, it’s all too easy to believe the people who are already seen as experts and changemakers. Three out of four of these founders have been featured on the cover of Forbes at one point in time — if that doesn’t solidify you as a reliable source of information, what does? Maybe we just can’t trust anything anymore.
Deceptive advertising, overpromises, and straight up fraud are nothing new in the business world — in the early 1920s Charles Ponzi lent his name to providing unreasonably high-return investment schemes by paying clients with others’ “investments” (the origin of “robbing Peter to pay Paul”), and Bernie Madoff perfected the technique in the 1990s at his hedge fund company, eventually defrauding supposed investors of between twelve and twenty billion. He was caught during the 2008 financial crisis when fervent withdrawal requests overwhelmed his ability to pay out, eventually resulting in a combined 150 years in prison sentences. In that sense, the fraud these founders have engaged in is nothing new. Nevertheless, the ease of marketing and fundraising enabled by the Internet and social media seems to have made scams — or at least, initially successful ones — easier to pull off in the millennial generation: you no longer need to start by convincing established investors or advertisers to believe in you. Just generate buzz on Instagram or Reddit, reach out directly to a random celebrity or two, and let things snowball from there. If that’s not enough, tap into an established social or financial movement (the rise of entrepreneurship and “being your own boss” or the craze about cryptocurrency) and turn it into a business that excites people. If neither of these options are relevant, there’s always the fast and loose Silicon Valley game to fall back on for funding — as if that hasn’t failed yet.
So while there’s nothing apparently inherent to millennial founders that makes them more likely to or more capable of committing fraud, the landscape they are operating in is substantially different — in some ways it’s easy to detect simple fraud, with the universal accessibility of information, but that environment also allows falsehoods and false promises and false hopes to spread quickly and easily. Our advice hasn’t changed from what people have been saying for hundreds of years: if something is too good to be true, it probably isn’t.
Bonus: some fun facts about these companies and founders that didn’t fit elsewhere in the article.
Fyre Festival’s famous original promotional shoot, you know, the one featuring internationally-renowned supermodels? It was basically just a giant days-long party on the beach, with jet skis and drones and pigs and beer. Billy McFarland once fell asleep on the beach in broad daylight (and there is footage of it).
Adam Neumann forced employees to eat plant-based meals “for the environment” but purchased a private jet with company money — as two vegetarians, this is not the way.
WeWork released some non-GAAP accounting metrics ahead of its IPO-that-never-was, including the well-mocked “Community-Adjusted EBITDA,” which failed to exclude rent, utilities, internet, and building staff salaries — its largest category of expenses.
Cringeworthy text messages between Holmes and Balwani during their relationship were revealed in court:
Holmes: “You are the breeze in desert for me. My water. And ocean. Meant to be only together tiger.”
Balwani: “OK.”
Last but certainly not least: when Sam Bankman-Fried met co-conspirator Caroline Ellison, she was dressed as a “sultry wood nymph” on her way to a live action roleplaying event. He offered her a job on the spot.