Other People’s Money (“OPM”) was the movie title about a fictional Wall Street raider, using capital from others to benefit financially. Why am I skeptical about the new fund-raising techniques revolving on virtual currencies from bitcoins to ICOs? Or even investment funds that focus on tech companies, yet extolling some peculiar strategies to monetization from investments. Simply because of my personal experience of what a tech founder did within a NYC startup in which I was a senior executive and he successfully OPM’d to the distress of investors.
When I read about recent WSJ articles highlighting the aggressive, business behaviors of young executives like Martin Shkreli or Travis Talanick , as the personality traits of rebels/entrepreneurs, I see something else: good old-fashioned, personal financial greed. Over a year ago, I read about a controversial San Francisco tech startup whose founder purchased a Ferrari immediately after raising millions of dollars for his startup that had yet to develop a product and had no cash flow. Now, in contrast, I have witnessed well-managed tech companies, but I have seen numerous others where I question the motivations for their existence and which practice obvious financial mismanagement for personal gain wi9th the classic OPM strategy.
Years ago, I worked in a telecom startup led by a “revolutionary” tech founder. Like any startup, it operated in a large empty loft space in Lower Manhattan. It had the hallmarks of a startup – young, enthusiastic team, many angles to reach its sales. The founder also expected everyone to take a large cut in average pay with stock options to come (which he awarded only a fraction as promised.) The company claimed to implement a proprietary telecom technology and be the first in the marketplace. The founder also advertised to be a visionary entrepreneur. Those 2 years as counsel told me so much about the startup world and how financing works. And has made me circumspect and suspicious of any startup financial claim.
Within 2 months, I discovered that the company had 299 other competitors nationwide in same space. The founder had questionable expertise in telecom. The founder’s first entrepreneurship had nothing to do with telecom, just real estate. He attracted other investors from his birthplace, Argentina, to invest in office real estate in New York. (3 years later those same Argentine investors sued him in the federal courts for embezzlement and fraud.) Of course, New York real estate is never a bad investment. So, how did he fail? But even that avenue seemed to be not enough cash for this entrepreneur. He also, during his telecom and biotech dabbling, kept selling real estate as far south as Florida’s Fisher Island. As my office was next to his, I would overhear his telephonic conversations attempting to sell Florida real estate. He never seemed to be discussing the day to day operations of the telecom company. Just his other strategies to reach his net worth for millions.
Soon after real estate venture beginnings, he joined forces with a medical researcher with a putative cure for AIDs. Although NIH, under Dr. Fauci – the World’s expert, never had acknowledged the existence of this miracle cure, the founder was able to raise funding through the Canadian public securities markets.
The telecom company, a Colorado corporation, was funded through a loan by the founder for $250k, and shared ownership between himself and his father in law. (The in-law was critical in selling his shares to third parties whenever a notable investor closed.) That loan was paid back after being funded by a couple of investors within a year. Yet, the company burnt through so much cash that the company needed constant monthly funding during my tenure. There were times that the company could not cover salaries the next month. In the meantime, the founder paid himself $500k, traveled extensively under the corporate tab, and had the company pay for the rental of an expensive townhouse. Even adding more to the cash burning, he had the company pay for his 2 nannies as salaried employees. (Under IRS rules, that would be treated as income to the founder.) And, he bragged about not paying federal income taxes as he considered himself to be a citizen of the world, not of the U.S. (To own any substantive equity in a registered, telecom company, the majority shareholder must be a U.S. citizen!)
Another substantive cash flow problem stemmed from the product pricing. The company burnt so much cash that it was profiled in Fortune magazine, as a symptom of too much froth in investments. Sales did grow dramatically, but that was fueled by a pricing that was far below its transmission costs, outdistancing the competitors. In other words, the faster it grew, the sooner it burned through cash. Profitability was not the focus. Investors just witnessed customer growth.
In spite of these observable defects, the company was able to go public. 2 years later and $2+ billion in debt and equity funding, it never reached profitability and filed for bankruptcy. Another way of saying it, investors lost over $2 billion. The remnants of this company were sold for $25 million. Meanwhile, the telecom founder used this “successful” company to fund other companies, some even funded, in part, by Google, and hit the same stone wall of lack of profitability. Zebras don’t change their stripes and never will with this founder. Recently, he has OPM’d a biotech company dealing with frozen human eggs. From real estate to AIDs, to telecom, to Internet, and now, to commercialization of “frozen” eggs. Somehow or another, he presents himself to be a visionary genius in many disciplines, something I find hard to swallow.
OPM is a fairly common strategy for these companies. Bernie Madoff, one of the worst, leeched billions. Common stock was the only currency for OPM. Today I see alternative funding mechanisms — ICOs and bitcoins — new approaches to OPM fundraising. Blue Sky laws and SEC were promulgated to protect individuals and institutions from fraud and misrepresentation. It only works when the individuals are caught. Nonetheless, the subject matter of my experience has never been indicted, and that suggests that only a fraction of these vapor company founders get caught. Interestingly, I have observed the identical strategies by founders in similar companies like Theranos where someone with not even a college degree claims to know more about hematology than medical experts with decades of experience and that company raised over $740 million and was even valued at $9 bill. When the FDA proved ineffectiveness of its science, it is now worthless. Just recently, I observed software engineers forming an investment fund without one iota of Wall Street experience. The fund manager gets a management six-digit fee for OPM management, regardless of his performance. So, there are many variations to the same practice. Caveat emptor.