Back in the fall of two thousand ten, Antonio Garcia Martinez was sitting in an apartment in the Mission in San Francisco. Antonio was co founder and CEO of a brand new startup called ad Rock. It was an exciting time for him. Yeah, Antonio at the time had just finished his time at y Combinator, which is kind of
an elite startup accelerator of Silicon Valley. And at the end of your time at y Combinator, you do a big presentation in front of a room of entrepreneurs and investors and show off in two minutes what you've made. And Antonio's presentation had gone really well, and a bunch
of investors were interested in giving him funding. And now he's sitting in the apartment of his co founder and they're all drinking a couple of beers and it's it's thrilling, and they're right at the precipice of all this opportunity. And then they get a call from a lawyer representing
their company at Rock, and the news is devastating. It turns out that their former employer is suing the company for stealing secrets and stealing intellectual property, and it's basically a death knell for ad roc because who in the right mind would invest in a company that is plagued
by lawsuits. So things are looking pretty bad. But because this is Silicon Valley where crazy dreams sometimes make it through, and Antonio is a scrappy guy, he's backed into a corner and he turns to his final resort, which is something that was definitely dishonest, and as we'll discover later in the show, of questionable legality as well. And it's something that happens here in the world of startups a
lot more often than you think. This has been public companies when we're on Wall Street, we would all have gone to jail. Right. The level of sort of just generalized lying, backstabbing, total conflict of interest and spilling of secrets is just rife in Selicon Valley, and it's just
kind of the way it is. Hi, this is brad Stone and this is Ellen Hewitt, and this week Undecrypted, we're bringing you confessions of one startup founder who lie this away and they're raising money from investors and how he got away with it. But there's a little bit of a dirty secret to the way these young startup founders work and get funded in the valley. No matter how many charts and spreadsheets you see, a lot of these numbers are kind of made up, and how could
they not be made up? And these are brand new businesses creating things that have never existed before. You can't count on the normal rules of commerce and decency and transparency to apply here. If you're thinking about going into angel investing, consider yourself warned. So let's go back to this moment. In two thousand ten, Antonio was sitting in front of his spreadsheet trying to get a handle on what the next year or two was going to look like.
So he's looking at his Excel and on one side he has the cash that expects to raise, as well as the revenue that he expects there soon to launch service to start to bring in and plout it. Against that, he has all the company's costs and salaries to office rent, to these very expensive fees that he was gonna have to pay his lawyers to fight this lawsuit, and it shows something pretty dire that the company is going to
run out of money in less than a year. Antonio published a best selling book called Chaos Monkeys that came out a few months ago, and in the book he has a passage which describes what he did next, and we actually had him read that to us. I didn't show the projections to the boys, I my my co founders, it would just depress them pointlessly. I also didn't share it with investors. Ag Rock was dead on arrival if this got out, so I lied. I diminished the cost
of the lawsuit too far below the Undertaker's projections. The Undertaker is the sort of grim looking litigator that we had managed to cajole into defending us. Meanwhile, moving our projected launch date forward to next month to generate revenues immediately and impossibility given all the changes the boys were making to the product. Then I jacked up the growth rate to an unconscionable amount. It was outright chicanery, cooking the books in the worst form. But it's either that
or give up now, and surrender was unthinkable. I still can't believe the investors believe my numbers, but they did. I mean, we're raising money for the sake of basically continuing the company, but also defending ourselves with other people's money effectively, and I love that. It's called the death clock. Which I think. I mean that you called the spreadsheet the death clock because it puts into perspective like what's
at stake, which is this or nothing? I mean, you have no no choice but to try to do what you could make it happen. And that's the name of the startup game. Is that learning the game faster than you burn money? And that is that is the day I'd say in the death clock, it was literally just a spreadsheet and it had all our top line items,
which is basically servers, rent and humans. That was it um against you know, a cash pile, and we plotted on a graph and I have a metaphor in there that it kind of looked like one of those infographics you see with any plane crash, like the planes going okay and then suddenly something happens and then boom you have like a smoking crater in the ground. Can you think back to that time and think about what how
did it feel to cook the books? I mean, what what was going on in your head when you when you change these numbers the things you knew were untrue and not even remotely possible. I mean, I think this is how moral rationalizing happens. And I think it's fairly common um. And I applied the same, you know, rational calculus later when I was considering deceiving my co founders
to go to Facebook instead of Twitter. It's for the greater good, right, Like everything, the world will be just be better if we perpetrate this sort of not so minor lie and get the company funded and continue. And it turns out I was right. The investors ended up making money, right. They ended up doubling their money in six months. So even though investors were fed these complete fabrications about the future of ad Rock, they still ended
up making a profit, right. And most of that is things only to Twitter, which decided to buy ad Rock about six months after the seed rout we're talking about. If anyone was going to be upset about being lied to, it would be a guy named Russ Siegelman. Russ was a longtime venture capitalist at Kleiner Perkins. He was an angel investor. He was really the biggest backer of ad Rock, And I called him after the book came out and
asked him how he felt about being lied to. And here's what he said, Well, I certainly don't approve of submitting projections to investors or anybody that you don't believe in. I don't know. I mean, it's not only dishonest, but it's it's it's just not it's it's not good business practice. But to be honest with you, the reason I don't react to strongly to it is because I don't believe anybody can project with any level of faith, accuracy or correctness, uh,
your revenues when you're at the seed stage. So you know, I frankly couldn't have even I probably would never have even noticed that the growth rate was unconsfortably high quote unquote, because I wouldn't have even looked at it. It's funny because he asked me for that projection. Do you think he just wanted to give the impression of reading it or I think that the big hang up there was that he no one wants to put money into a sinking ship, right, And I thought of putting money into
a company that's fighting its way to have lawsuit. And he felt he was subsidizing Fenwick because I would literally take money from one rich guy and give it to another rich guy called a lawyer, and we would just be the middleman. He didn't want that to happen Fenwick, by the way, is the law firm that Antonio hired to defend him in the lawsuit. And so I could only convince Rest to invest after Fenwick basically a great
loanus the money. And so you know it's possible that it was you know, it was someone in my head and he didn't even look at the projections. Maybe it's interesting because he he is a savvy investor. In Krissock, it was a savvy investor, and and so it wouldn't surprise me if for very early companies, you know, projections are projections, and they don't they don't look at it, and they're they're evaluating a company more on the quality
of the team and the quality of the idea. Right now, I think they are canny investors, right And I remember one investor I won't name, we immediately excluded because you asked me for a yeah business plan and a cash flight projection has like the first question he asked and I never got it to him, and it just it felt like a very j V movement. And you're absolutely right there. I think at that stage what you invest
is in the team, not some spreadsheet. So the question I think that interests us is you know how how widespread then is as as you describe it, outright chicanery? Is it? Is it? Is it seed stage startups? Or does it expand beyond that? Could we see a late stage company, uh, you know that's not yet public, that has that same sense of desperation the spotlight is on them, you know, resort to fudging the numbers? I think a
little bit harder um um. Like a piece of advice I think I got from Russ actually was at the beginning, it's easy to sell the dream right before you've actually launched, because you can tell the story and no one cares about the numbers. But after the dream has sort of launched, at some point you have to provide numbers, and maybe
even audited numbers. And so I think if you ask me, is there is it common to have outright fraud at large companies just to name names, Not that I know anything, but like an ubern Airbnb, I think no, there isn't sort of widespread fraud. Yeah they're being Yeah, there's no way you'd get away with with that. What what I did at that level just absolutely I can't imagine that's
that would happen. The reason why this is all funny money and funny numbers is because not to get too wonky, the evaluations we're talking about are the theoretical valuation of the company if the company were to raise another round and there were these these people are buying their lending you money on the terms that hey, when you actually raise money, this is how much I paid per share, which is less than later investors, and that's that number is.
So it's an input to a theoretical calculation. It sounds a little bit that it has a little whiff of pyramid scheme to it. No, No, it absolutely is. Yeah, No, it does, it does. Just to be sure, I called up an expert on startups, Rob Siegel, not to be confused with Russ Siegelman, who we just talked to. Rob Siegel teaches at Stanford Business School, and he said that it's true that startups give investors optimistic protections all the time. When an entrepreneur at the seed level walks in, every
sophisticated investor knows that the forecast is wrong. What you're looking for is the thought logic that goes into not the tops down. The market is worth six trillion dollars and we're going to capture five percent of it. But how many units of whatever good or service are you going to sell? And how much are people going to pay? And how many people are out there that might buy it? And what's the logic that's gone into that forecast? Are any customers using it already and are they paying a
company any money? The forecast, by definition are going to be wrong. It's impossible to know the future exactly, especially at the seed stage. So institutional investors know that when something comes in, it's probably aggressive, it's probably uh, slightly overstated. You hope it's not over lying, but you know, if somebody's being aggressive, is their logic behind the expected ramp
and forecast? That's completely common and normal. But Rob said that even in a world where Rosie projections are the norm, he thinks Antonio crossed the line. So to Russ his point that he knows that the forecast don't make sense. I think all vcs and all institutional investors and all sophisticated angels know that the forecast is going to be wrong.
The question is that they're good logic behind it. The point about whether or not this is legal that's more worrisome in this particular example because if an entrepreneur is knowingly lying, knowing the line that revenues will not commit at a certain time, knowing the line that the growth rate is impossible as opposed to aggressive, you know, um is purposefully cutting down the costs of the expected lawsuit because the entrepreneur knows it's going to be much higher,
but is knowingly you know, dividing by two. That's where you get into, you know, potential legal complications because you are actually misleading investors. You're knowingly misleading in investors. So, Ellen, you reviewed Chaos Monkeys for Business Week. We talked to Antonio. Did this episode make you more cynical about Silicon Valley? You know, I think as a startup reporter covering Silicon Valley, I get the impression that people lied to me all
the time, but I'm never sure. So reading someone talking so baldly about it, uh, definitely made me a little bit more cynical about it. It It made that part of me that thinks people aren't really honest about the month or a month growth. That part of me is smaller now. I guess I'm more inclined to give them the benefit of the doubt. I mean, I guess I feel like
no one here knows what's around the corner. Everyone's just trying to do their best impression of being confident about all these changes, and at least the savvy investors are going to take any projections with a grain assault. And I feel maybe Antonio was grandstanding a little bit and describing what was really typical uncertainty as a sort of
outright falsehood. And another wrinkle is as Silicon valiant and startups become more popular and people see these huge gains coming out of it, I think we're gonna see a lot more people outside of the traditional investors. We're talking celebrities, other people of high net worth interested in investing in early stage startups, kind of like Antonio's. And I just wonder if it means that we should be hoping that they get more fair information. They don't have the same
savvy that Rusta. They haven't been doing this for thirty That's a good point, right, do do Britney Spears and her agent know that that? And Antonio Garcia Martinez may be making up as numbers should probably not, maybe after you've written this book. This is a mooch question, But if you were to make a new startup today and you and you ended up in a position like this again,
death clock, would you lie? Oh yeah, yeah, I think yeah, yeah, definitely it's for the great because because when you're in the ship, you do everything to save the ship. It just doesn't matter. That's the way it works, right, I mean why Combinator was still relatively new back in two thou ten. Do you think that there are more checks and balances that exist in those programs and other other incubators to ensure that there's a level of honesty in
the dialogue between investors and entrepreneurs. No, No, I don't think so. I mean the real is that it's never lying right like, it's never outright fraud like Obviously I'm a little hyperbolic in the book, right I've I've I've personally seen very few cases of like fraud like we claimed we had a hundred million top line. In fact it was nothing like. I've never seen that before. But you could definitely there's all sort of ways you can lie with statistics and with figures that would impress um,
that would impress and and yse startups. I think maybe unfairly our character are in the sleeve are famous for their up into the right graphs and which they rescuyle the y exist always make look make it look amazing on demo day, right, And so you know, stuff like that I think is pretty common, and I think it's still happened, and there us as point investors are probably savvy to it and they know they know it. The better questions why do we even go through the arade? Right?
But I don't know. Actually that's a good question. Well, and so when when we saw us as answer, which which came in um uh pretty you know, pretty soon just before we talk to you, it made me think, um, you know, Russ has been doing this for decades. He knows what's up. If you continue to see I think a trend of more people and we're talking like celebrities or other rich people with with cash who want to get in on startups and and seeing investing is very
um attractive to them. Do you think that changes the moral calculus at all? Like is there more of a responsibility to be up front? You'd like to think so, but not really. It's like the battlefield and there's like no women and children out there, right, and like if you show up and you're you know, it's like the old drug about like we're sitting at the poker table and you you don't know who the sucker is. Then it's you right then, like you know still can value still
that way? There it is, And that's it for this week's episode of Decrypted. Thanks for listening. We're a brand new show and we'd love your help in spreading the word. If you have an iPhone, please subscribe to the show on your native podcast app and leave us a rating and a review there. You can also rate and review us on iTunes, and we're on a bunch of other platforms like SoundCloud, pocket Cast, and Stitcher. And tell us
what you thought of today's show. Write me on Twitter at at Bradstone and I'm on Twitter at Ellen Hewitt. This episode was produced by Magnus Hendrickson and Liz Smith and aki Ito. Aaron Black assisted with recording Alec McCabe as head of Bloomberg Podcast. We'll see you next week.