Competition for deals in the current market has crunched the time available to VCs who want to conduct thorough research, and that has led to sloppiness. — Hands photo created by rawpixel.com - www.freepik.com
Last autumn, multiple investors were chasing an Atlanta-based company called Knightley. It makes professional networking tools for the founders of tech startups and their backers. At a hot moment for private companies and their valuations, it seemed like potentially the right product at the right time.
What drew prospective investors to Knightley was a listing on Crunchbase, a popular database for tracking venture capital deals. It showed that among the company’s impressive roster of backers was the VC kingmaker Marc Andreessen. This same page attracted the attention of a Bloomberg reporter who set up an interview with the founder Graham Gintz.
Gintz revealed what he said he had explained to several VCs in recent months: Neither Andreessen nor any of the other prominent names listed on Crunchbase were investors. He made it up.
The fabrication was a stunt designed to demonstrate the poor quality of data available on startups, Gintz said. “They did nothing to verify,” he said. Gintz readily admits this to anyone who asks, at which point VCs typically lose interest in his business, he said.
The fib hasn’t yet secured him funding beyond Knightley’s US$105,000 (RM440,055) in seed capital, he said. (He embellished the number as US$1.5mil/RM6.28mil on Crunchbase.) But it did get him something else of value. “I’d rather be a little bit noisy and rambunctious than to go unnoticed,” he said.
In a market so overblown, attention is a currency of its own. Startup funding reached US$621bil (RM2.60 trillion) last year, more than the amount raised through initial public offerings. A small industry of market research firms exists to make sense of what little data – much of it based on an honour system – is out there. (Bloomberg LP, the parent of Bloomberg News, is among them.) The firms sell this information to VCs and other investors, who rely partly on it to help decide which companies get their money. But even as more of the world’s capital shifts to private markets, financial disclosure remains spotty.
Gintz said he has since corrected his Crunchbase entry after one of the aggrieved VCs contacted him. Of the dozen or so investors who reached out after seeing his made-up data, one remains interested in funding his company, Gintz said. He expects Knightley will secure a new round of capital in the next month or two.
Crunchbase relies partly on crowdsourcing, similar to Wikipedia. The site asks people to verify their identities using a company email address before editing their startup’s profile, said Matthew Schulman, a spokesman for Crunchbase. The system automatically flags suspect submissions for review by its analysts and rejects data deemed incorrect.
“Knowing that a small percentage of founders may try to misrepresent their company information on Crunchbase, we have multiple systems to protect the accuracy of our data,” Schulman wrote in an email. “However, our experience is that community contribution from founders, investors and employees is also helpful to understanding the private company environment.”
Other widely cited research firms, like CB Insights and PitchBook Data Inc, similarly employ analysts and use web crawlers to scour news reports, press releases and the occasional disclosure in regulatory filings. Finding incorrect information is rare, and most entrepreneurs are truthful, said Anand Sanwal, who runs CB Insights. Still, he acknowledged, startups do “sometimes put out some numbers that are a step or two ahead of reality”, especially pertaining to revenue.
PitchBook said its process is rigorous. Members of its data team seek to verify information, including by contacting people involved in deals. PitchBook can “typically catch fraudulent data quickly”, a spokeswoman said, but “it can be difficult at times”. That’s especially true, she said, with deals in China and those involving the family offices of billionaires, both of which are subject to less stringent reporting requirements.
“I would not rely solely on the database,” said Patrick Chung, co-founder and general partner of XFund, a seed stage investor. “It’s often a first stop and never the last, definitive word.”
Before writing a check, Chung makes some calls. He has discovered entrepreneurs lying about commitments from other investors or customers, he said. One falsely claimed to be admitted to the prestigious startup boot camp Y Combinator. Others invented accomplishments to make themselves seem more interesting, Chung said. One falsely said he was an airplane pilot, and another lied about writing a novel.
One of the most prized databases on which a startup can be featured is Sanwal’s CB Insights unicorn list, but even that page is imperfect. At No. 96 is the Black Unicorn Factory. It appears to be the most valuable startup in Los Angeles. But the real story is more complicated.
The Black Unicorn Factory was founded in 2020 by John Stewart, a self-described serial entrepreneur, author, investor, philanthropist, speaker and mentor. The company, which is also listed on Crunchbase, purports to be a sort of incubator of Black-led startups.
Until last week, a banner on the Black Unicorn Factory website touted a US$7.7bil (RM32.27bil) valuation. Stewart reported last year in a filing with the US Securities and Exchange Commission that it raised US$420mil (RM1.76bil) from investors. An accompanying press release identified Barter Ventures as the lead investor in the Black Unicorn Factory. According to California records, both companies were incorporated by Stewart.
The Black Unicorn Factory’s flagship product is an app called Follow Me For Equity. It says people can earn shares in startups by simply following them on social media, according to a listing on Google’s app store. The page also indicates the app is installed on fewer than 500 devices and has garnered a single five-star review by someone named Juan Stewart.
Online videos promoting Follow Me For Equity feature the rapper Ice Cube and Black-ish star Anthony Anderson. The videos were arranged by Cameo for Business, which charges US$2,000 (RM8,382) to US$3,000 (RM12,573) on average for celebrities to record personalised messages. A representative for Anderson said the actor is not affiliated with the Black Unicorn Factory and referred questions to Cameo. A representative for Ice Cube didn’t respond to requests for comment.
“I don’t know anyone who might be connected to these people,” said Sherrell Dorsey, founder and and chief executive officer of the Plug, an online publication that chronicles Black-led technology startups and trends. “It feels like a dummy site. Is this someone’s project where they just wanted to see how ridiculous they could build this narrative?”
A representative for the Black Unicorn Factory declined to comment. The startup remains on the CB Insights list. Sanwal referred to the Black Unicorn Factory’s SEC filing and indicated he was otherwise unfamiliar with the business. The SEC has said it doesn’t verify the accuracy of corporate disclosures.
A good startup investor is expected to do her due diligence, said Kate Mitchell, a founder and partner at Scale Venture Partners. That means contacting customers, talking to people who know the entrepreneur and asking to review bank statements.
However, competition for deals in the current market has crunched the time available to VCs who want to conduct thorough research, and that has led to sloppiness. There are plenty of schemers “ready to take advantage of an investor’s fear of missing out”, Mitchell wrote in an email. “The best protection from a scam is to do your homework.” – Bloomberg
