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posted by LaminatorX on Friday September 26 2014, @10:27AM   Printer-friendly
from the online-pet-food dept.

Tech investors gave Seth Bannon millions of dollars, even though they knew almost nothing about him.

Every successful startup is in some sense a confidence game. Any founder who told the literal truth about the frenzied ad-hoc-ery of launching a company would scare away customers and investors and quickly be out of business.

The company Seth Bannon founded in 2010, now known as Amicus, had raised nearly $4 million from investors and was the rare start-up that made money while doing actual good, helping nonprofits like the AFL-CIO and the Texas Democratic Party mobilize supporters. An Obama campaign alumnus, Bannon frequently appeared on panels at conferences like South by Southwest. He inspired mentions not just in tech publications, but in business and general-interest outlets like The Economist and The Atlantic, which gushed that Amicus had “helped activists in Minnesota and Washington win same-sex-marriage campaigns.” In 2012, he and his co-founder Ben Lamothe were named to the Forbes “30 under 30” list of social entrepreneurs.

http://www.newrepublic.com/article/119350/amicus-app-how-tech-investors-are-failing-due-diligence

[Related]:
http://www.economist.com/news/business/21567403-techniques-presidents-election-campaigns-have-spawned-one-lot-young-firms-obama

http://www.forbes.com/pictures/ekeg45kfk/seth-bannon-ben-lamothe-28-28/

http://www.theatlantic.com/politics/archive/2012/11/the-social-network-effect-that-is-helping-legalize-gay-marriage/265793/

http://www.nytimes.com/2013/05/05/magazine/y-combinator-silicon-valleys-start-up-machine.html?pagewanted=all&_r=1&

There must be some from SN who have either worked with such startups or been involved in some other way. What were your impressions? Is such fraud more rampant than what comes out in public?

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  • (Score: -1, Offtopic) by Anonymous Coward on Friday September 26 2014, @10:59AM

    by Anonymous Coward on Friday September 26 2014, @10:59AM (#98532)

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    $ TAILS Download Site:
    https://tails.boum.org/download/index.en.html [boum.org]

    ###

    "TAILS, The Amnesic Incognito Live System, version 1.1.2, is out.

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    Before this release, users on a compromised network could be directed to sites using a fraudulent certificate and mistake them for legitimate sites. This could deceive them into revealing personal information such as usernames and passwords. It may also deceive users into downloading malware if they believe it’s coming from a trusted site.

    ( Changes )

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    [3] https://blog.mozilla.org/security/2014/09/24/rsa-signature-forgery-in-nss/ [mozilla.org]
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    • (Score: 0) by Anonymous Coward on Friday September 26 2014, @11:08AM

      by Anonymous Coward on Friday September 26 2014, @11:08AM (#98533)

      saw some mention of linux, but tldr

      and stories with big words are too hard to comprehend on weekends. hurts empty space between ears

    • (Score: 1, Insightful) by Anonymous Coward on Friday September 26 2014, @11:49AM

      by Anonymous Coward on Friday September 26 2014, @11:49AM (#98538)

      There's only one question I ask these days when analyzing a Linux distro: Does it use systemd?

      If the answer is yes, then I know for sure that I can't trust the judgment of the distro developers/maintainers, and I won't use that distro.

      • (Score: 3, Interesting) by LookIntoTheFuture on Friday September 26 2014, @12:29PM

        by LookIntoTheFuture (462) on Friday September 26 2014, @12:29PM (#98552)

        There's only one question I ask these days when analyzing a Linux distro: Does it use systemd? If the answer is yes, then I know for sure that I can't trust the judgment of the distro developers/maintainers, and I won't use that distro.

        The already short list of (major) distros is getting smaller. After years of running linux, I'm checking out the various *BSDs. Maybe they have better leadership and respect for standards.

  • (Score: 5, Informative) by MrGuy on Friday September 26 2014, @11:58AM

    by MrGuy (1007) on Friday September 26 2014, @11:58AM (#98540)

    LaminatorX, this is a really poor job of editing.

    The summary is a few paragraphs copied verbatim from TFA, which is not uncommon.

    What IS uncommon is that the summary makes no mention of THE ACTUAL ISSUE that in theory we're trying to talk about here (investors who don't do their homework on tech companies), or the important story behind what actually HAPPENED at his company. I had to read TFA to even understand where the whole "fraud" issue came into the conversation at all.

    This isn't a summary. I realize that the submitted probably submitted it this way, but how does someone "editing" the article not realize that the summary...isn't?

    For those who want an ACTUAL summary, Seth Bannon (more than adequately introduced) as sole CEO was a disaster financially - he failed (possibly deliberately) to pay payroll taxes (leading to a massive penalty and loss of his two original co-founders). He also claimed (falsely) to have "dropped out of Harvard" when in fact he'd just registered for a few (basically open) extension school courses. He presented a sufficiently confident outward personality to continue to get funding (after impressing investors through Y-Combinator). He raised millions, despite past failures. He suddenly "discovered" (months after he actually knew) his company was close to broke, and his investors still kept him afloat. The article wonders why the investors were so willing to invest in a company with no good financial management, and failed to abandon him when he proved unworthy of their trust.

    • (Score: 2) by velex on Friday September 26 2014, @01:28PM

      by velex (2068) on Friday September 26 2014, @01:28PM (#98559) Journal

      I second this. TFS should summarize TFA, not provide an intro and leave us hanging.

      Thanks for the summary, btw. I figured it was something like that.

      Hmm... being a confidence man sounds like a pretty good line of work. I suppose the trick is to "hack" investors and replace duediligenced with a trojan. (I'm sure there's a systemd joke here somewhere.)

    • (Score: 0) by Anonymous Coward on Friday September 26 2014, @01:29PM

      by Anonymous Coward on Friday September 26 2014, @01:29PM (#98560)

      The reason is right in the summary (as such as it is) An Obama campaign alumnus

      He 'knows' people. Confidence schemes are pretty much that with this sort of money. Knowing someone or at least the 'air' of knowing someone. The marks are easy because they are at least semi smart. A smart mark is better than a stupid one. You can weave a tail that makes sense to them. In this case I would bet he weaves a tail of how he 'is a key person in the democratic party helping them connect with their youthful undeserved audience and they are willing to come off money and eyeballs to help them out'. I can just imagine the spin. Just so long as he can keep the current group of suckers on the line to introduce him to the next group of suckers.

      If he does not end up in prison he will write a book when it all spins out and give conferences on the whole thing. Perhaps drumming up a new group of suckers for a new chain.

  • (Score: 2) by khallow on Friday September 26 2014, @01:28PM

    by khallow (3766) Subscriber Badge on Friday September 26 2014, @01:28PM (#98558) Journal
    While trying to figure what this story was about, I came across this:

    But the system that put so much money in his hands without checking if he could handle the most basic functions of leadership—well, that system has something to answer for, too.

    This "system" consists of two parts, gullible investors putting in their own money, and various sorts of institutional investors who use other peoples' money. For the former, the disease is the cure. The gullible investor will wise up or they'll eventually run out of money, curing that problem either way.

    The latter is the real problem. For example, it's possible to profit considerably from dumping money into a loser like this. For example, if I put other peoples' money (say, from a fund I run) into Amicus, and they then buy overpriced services from a startup that I personally happen to own part of. Then I just turned that money into personal profit.

    Alternately, if Amicus happens to do a service that is politically popular, then dropping some public funding might allow me to add a nice sound bite/talking point to my mass mailings, TV interview, or website.

    • (Score: 3, Informative) by bzipitidoo on Friday September 26 2014, @02:45PM

      by bzipitidoo (4388) on Friday September 26 2014, @02:45PM (#98578) Journal

      Hardly the only problem. Wherever there is money, there is dirty dealing. I've seen this even in small tournaments with a bit of prize money. Doesn't matter what game it is, chess, poker, bridge, pool, or some sport. Soon as a few hundred dollars are on the line, the scumbags come out of the woodwork, and every one has some angle. The pool shark is well known. There was the sandbagger who instead of hiding his skill like the pool shark does, bragged about how he purposely threw the last dozen or so games he played in order to get his rating below the limit for an easier section. Why? To psyche out his opponent, for one thing. There was the guy who had the inaccurate clocks and arranged it so his opponent got less time. Then there are the rules lawyers who call their opponents on every little thing, even imaginary stuff, forcing a judge to halt the game for a few moments. If they don't win on a technicality, they hope to rattle their opponents with the constant need to defend themselves from the nit picking. Even once had the tournament organizer turn out to be the scammer, collecting all the entrance fees and handing out a little prize money, but then taking off with the rest instead of paying the national organization their part and sending in the results.

      Institutional investors have had big targets on their backs for decades. These are people responsible for managing pension funds, retirement funds, and municipal bond money that has been parked in investments until needed. The criminal bankers know these guys have tons of money. On a side note, another thing the banks have done is colluded to portray municipalities as riskier than they actually are, and colluded on the rates that they bid so that the banks can charge them higher interest rates. The institutional investors and their funds were the big victims of the housing bubble. They have to put the money somewhere, and that's the problem. They're money that's looking for good investments, and there aren't enough good investments to go around, and also the noise level from all the fraudulent investments is deafening. And, as you mention, there can easily be conflicts of interest of the Hollywood Accounting variety.

      As to startups, I've been in 3, and they all failed. It usually gets nasty. 2 of them were run by nice guys who couldn't bear to deal with too much bad news, preferring to hide under their beds. The 3rd was run by an arrogant ass who couldn't accept that he and his so-called vision was the number one reason the company failed. He blamed and fired the entire sales team twice. When sales team number 3 still couldn't make enough sales, he turned on the programmers and blamed us all for not working hard enough, not banging out functionality rapidly enough. In all 3 cases, when the money ran out, they did not tell the employees, leaving us to read between the lines or get screwed when they failed to make payroll at the end of the month in which they ran out. They all had the audacity to ask their best employees to continue working for free, in the hope that the company would shortly become profitable and could catch up on everyone's pay.

      Or they hoped to find more investors, which is very difficult to do with a history of nothing or failure. Still, one of the nice guys was presented such a bad deal by some investors that everyone agreed it was better to fold than take the deal. The deal was that in exchange for a few million in investment, we had to hire 6 of their people at very generous pay, so generous that just about all the investment would go right back to these new hires. And no, we couldn't dismiss them before they collected the pay. And further, as part of the deal, the investors would end up owning everything-- all the intellectual property, the products, and the company. The deal was so bad it didn't seem like a real investment deal, but more like that they wanted to use some desperate startup to launder money and dodge taxes. Perhaps it was one of those schemes to bilk their own funds in order to transfer money from the fund to themselves. Nearly any tech startup would do to give them a veneer of legitimacy.

      • (Score: 2) by Thexalon on Friday September 26 2014, @03:01PM

        by Thexalon (636) on Friday September 26 2014, @03:01PM (#98582)

        Wherever there is money, there is dirty dealing.

        Some more startup-related phenomena that friends and coworkers have been involved in:
        - A company that changes its name every couple of years to try to shake off the lousy reputation it accumulates each time.

        - A guy who ran a legitimate-seeming contract agency, who when it came time to pay the contractors instead took the money in cash and ran off to a jurisdiction where US law enforcement and the contractors' lawyers couldn't get to him.

        And don't think big business is even close to immune. My personal favorite was a CTO who was trying to shed in-house staff in favor of an outsourcing firm - which was hardly surprising, since he owned a significant percentage of that outsourcing firm.

        --
        The only thing that stops a bad guy with a compiler is a good guy with a compiler.
  • (Score: 3, Interesting) by tibman on Friday September 26 2014, @01:51PM

    by tibman (134) Subscriber Badge on Friday September 26 2014, @01:51PM (#98564)

    I think it comes down to sunk costs. If they paid for 2mil$ worth of company stock then they partially own that company. Those investors don't want to lose 2mil and if the company fails then that is guaranteed. Giving another 0.5mil seems worth it to not lose 2mil. Then in six months it's the same scenario with 2.5mil.

    I currently work for a startup that has successfully started. Bane Capital has put a few mil in but still owns less than 50%. My company is a spin-off from a previous startup that sold for hundreds of millions. The same person who created that company is in charge of mine. She only works because she enjoys it. So far this company is doing well and is actually making money. The product is good though still very young. But we are audited like crazy. Everything seems audited by outside people. It's like having a dozen coaches for a team of six, lol. The only way this company will fail is if whoever buys it just lets it rot.

    Seth Bannon is just a straight up liar. Not only that but probably slightly crazy. He wouldn't hire someone if they didn't like the same things as him. Investors not having periodic meetings to double check his books also sounds crazy. Not finishing an app that sends digital postcards sounds crazy. A couple developers for a couple months could have done it.

    --
    SN won't survive on lurkers alone. Write comments.
    • (Score: 1, Insightful) by Anonymous Coward on Friday September 26 2014, @03:56PM

      by Anonymous Coward on Friday September 26 2014, @03:56PM (#98608)

      If they paid for 2mil$ worth of company stock then they partially own that company. Those investors don't want to lose 2mil and if the company fails then that is guaranteed. Giving another 0.5mil seems worth it to not lose 2mil. Then in six months it's the same scenario with 2.5mil.

      This is where discipline comes in. When they started out, they figured that the reward was worth risking $2M. The plan at that time should have covered the conditions under which additional funding might be required and contingencies for it. Needing more money by surprise should be a serious warning that either the plan was bad or the execution has been bad. Neither of those is a situation you want to throw more money into.

  • (Score: 1) by albert on Saturday September 27 2014, @07:53AM

    by albert (276) on Saturday September 27 2014, @07:53AM (#98845)

    Much of what he did was borderline evil. I guess "nonprofits like the AFL-CIO" sounds better than "corrupt union thugs".