Wednesday, August 31, 2016

Honestly? Tech Startups are Giving Themselves a Credibility Problem

The last week has seen some intense scrutiny about the honesty and trustworthiness of some tech startup companies, with a former employee blogging about the startup that 'scammed them', Hampton Creek apparently being investigated by the SEC for its business practices, and Theranos admitting that data it recently presented at the AACC conference didn't follow basic procedures to protect patients. Given the frequency of these 'accidental' behaviours that always seem to financially benefit the company or CEO involved, it seems there might be a selection of personality traits that predispose those leading startups towards such actions.

It's certainly not all startup CEOs who are like this, I've had the pleasure of working for two CEOs who went above and beyond to be fair, reasonable, and honest in their dealings with both staff and customers, as well as a few who while not necessarily exemplary, made sure to follow the rules. Unfortunately there are few who have lived in Silicon Valley and worked in startups who haven't encountered a CEO most would consider between unethical and criminal in their actions, and it's often an expensive lesson for those of us who have been through it. There are enough of these 'bad apples' that make you wonder, like with the finance industry, is there something in the Silicon Valley startup system that's attracting and encouraging this type of person?

Looking at the three cases I mentioned earlier, we can get an idea of the types of scams that can be played on employees and investors, and why CEOs try them even when you would think there is a high likelihood of being found out.

Theranos. Again.
I've written about Theranos several times, a company reporting to perform many blood tests quickly with a finger prick of blood, but whose coverage was more focused on the attention seeking CEO, Elizabeth Holmes, than the company itself. It is under investigation by both the FDA and SEC for claims made about their technology to both patients and investors, and recently they presented at the AACC conference in an attempt to win over the scientific community. While they mostly avoided answering pertinent questions, they presented some new data from their systems, especially regarding a Zika virus test. They were attempting to have their FDA approval of this test expedited due to the urgency of the current outbreak, and it would help them sell the system despite their CEO from being banned from running a blood testing company. They did not win the approval of scientists, but were hoping that this would give them the thin veil of legitimacy.

Well it turns out that they didn't follow the standard basic patient safeguards when gathering this data, and have now withdrawn the test from the approval process. John Carreyrou at the Wall Street Journal continues his excellent reporting on this company, and not only do the company try this even under the scrutiny they are under, amazingly they still try to spin this as a positive for the company:

“We hope that our decision to withdraw the Zika submission voluntarily is further evidence of our commitment to engage positively with the agency,” 

They continue in the Big Lie - if they say it often enough, people might believe it. Their 'mistake' though is so basic that you have to wonder if anyone in Theranos has actual blood testing experience, or why those who do still haven't left in shame. Perhaps this is was done under tremendous pressure from the CEO to have data she could use and corners were cut, but regardless it points once again to a disregard for rules and the rights of others, as well as a lack of empathy for potential suffering. Given that the CEO has complete control of the company, this culture that fails to consider safety and process has to either come from, or be condoned by, Holmes herself.

Just Mayo?
Hampton Creek are a startup that claims it will soon be a 'unicorn', (valued at $1 billion or more), as they produce vegan mayonnaise and other 'healthy' products. It does seem that 'healthy food' startups are getting outsized funding and valuations, and as I've covered before there can be great pressure on a CEO to maximise the company valuations especially in the leadup to a new funding round. Hampton Creek are reportedly being investigated for sending consultants into supermarkets selling their mayonnaise and buying the stock, and then recognising this income as revenue just before a $90 million funding round. While claiming this was a quality assurance program, that's 'highly unusual' and even if so should have been accounted for separately. 

This may seem like a minor thing to do, but is far from it. While any company will want to get the best publicity for itself, artificially inflating sales figures or planting untrue stories in the press regarding deals or valuations move into the realm of fraud. The SEC are involved primarily because this was done just before a large fundraising round, and presumably want to know if investors were shown inflated sales figures in an attempt to artificially raise valuation. For many years Silicon Valley startups have assumed that such securities laws do not apply to them, however recently the head of the SEC has made it clear that this is not the case, and these laws will be enforced. I suspect we will be seeing more such cases in the coming years.

Any company that does this shows that lack of regard for the law, the belief that it does not apply to them, and possibly simply a need for admiration and to boost their self image - and once again in a startup, the founders/CEOs usually have near complete control and there is no-one to place a check on their behaviour.

"The Check is in the Mail!"
Penny Kim blogged about her experience after she accepted a job as Marketing Director of WrkRiot, and encountered an extreme form of a very common form of startup experience - being told that "your paycheck is coming soon!" when the money simply isn't there. Now running a startup isn't easy, and it's not uncommon to be waiting on funding coming in to pay bills, but not being honest with employees about the likelihood of their next pay check appearing is disturbingly common and seemingly acceptable to many. Most states view not paying employees very dimly, and there are can be significant penalties for companies that do so - on top of losing the loyalty of your staff. Every reputable boss I've worked for has been clear - employees get paid first no matter what, and if you can't pay them you talk and negotiate with them as soon as possible.

Having worked at a company that in the early stages chose to have everyone as contractors rather than employees, which then failed to tell us the money had run out (despite a week earlier talking about hiring more staff) and abused the monthly invoicing schedule to have us work 6 weeks without pay before telling us, it's not something you forget even when you later receive the monies owed.  (We later found out they actually did have money in the bank, but were saving it for 'more important things') What WrkRiot allegedly did though was even worse - it looks like they may have fabricated evidence of large wire transfers to the company so that the employees could be paid 'in the next couple of days'. If so, this is fraud, and likely easy to prove once a State Attorney General becomes involved. 

Once Penny Kim realised this, and both applied her legal rights and encouraged other employees to do so as well, the company retaliated and fired her (illegal). She finally received her wages, but not the other monies owed by contract, and in a situation I'm familiar with essentially the company makes it clear that to get the rest of what you're owed you're going to have to go to court. They know most people just don't want that hassle and expense.

What they didn't count on was Penny blogging about the experience, and it was soon discovered who the company was. The company, WrkRiot, then responded on their Facebook page calling her a "disgruntled former employee", that her actions were slanderous (even though 'libelous' is the word they were looking for), and the company would be pursuing legal action. This clearly hadn't been vetted by the company lawyer and soon disappeared.

As a "disgruntled former employee" myself, I want to point out that "disgruntled" simply means "angry, dissatisfied, aggrieved, resentful" and has no implications as to whether that is justified or not. Modern usage seems to imply there is something negative about the term - if what Penny Kim wrote is true then she has every reason to be disgruntled.

Overall this is appears to be quite egregious behaviour on the part of WrkRiot, however ask anyone living in Silicon Valley and working in startups for a time, and they'll tell you stories like this, or worse. Often, the companies in question are funded by large well known VCs or in national publications list of "Best Startups to Work For". What goes on inside such startups is often very different than the facade the media often portray.

Warning signs
It takes experience, and a few scars, to learn to spot the signs of companies and CEOs who behave like this - I've worked for a few and each time I've got faster at noticing the signs and protecting myself. It's still tricky, society and companies work better when there is trust, and most people want to believe the best of others - and it's that attitude a few take advantage of. It's only a small subset of society that think this way, but the large sums of money now in tech startups, along with the minimal oversight from the funders, attract these personality types.

How to spot them without going through the pain yourself? Firstly, not all CEOs who do such things are doing so deliberately, some are simply inexperienced, incompetent, or just out of their depth and panicking - regardless, it's your career and paycheque, and they've chosen to be in that position. You have a contract with your company, they need to honour it, and you don't need to do any more than is on paper - if they fail to meet their side of the deal, you don't have to meet yours (when it comes to that, get a lawyer, don't be cheap). Be clear and communicate with them, but in the end, protect yourself whether it's accidental or deliberate.

Watch what the company does and remember that only three things will tell you how they will act in future - their record of actions, their record of actions, and their record of actions. Don't listen to what they say, watch what they do. If they do it to other staff, they'll do it to you. Isolated incidents of problems do happen in startups, but put the onus on them to prove they are being honest. If things happen more than once, trust your gut and get out early.

I'd recommend reading books such as "The Wisdom of Psychopaths" by Ben Dutton and educated yourself on the patterns of their behaviour and how 'normal' they can seem at first. One poster 'Theodores' on the HackerNews thread on Penny Kim's post made a good observation that finally made clear something I've been struggling to tie together - CEOs who don't make the 'psychopath' definition yet have some similar traits and abuse their position seemingly without remorse.

Even if we have gone through the mill several times we may not be educated as to what is only going on. You have to be done over by someone at the extreme end of the spectrum of personality disorder to understand what really goes on with the tyrants and bullies that frequently own companies, start-up or otherwise. We even elect these 'personality disorder' types to high office without anyone pointing out that they are not fit for the role due to having these psychopath tendencies.

He then links to the Wikipedia definition of Personality Disorder Cluster B which lists the following behaviours:
  • Antisocial personality disorder: a pervasive disregard for the law and the rights of others.
  • Borderline personality disorder: extreme "black and white" thinking, instability in relationships, self-image, identity and behavior often leading to self-harm and impulsivity.
  • Histrionic personality disorder: pervasive attention-seeking behavior including inappropriately seductive behavior and shallow or exaggerated emotions.
  • Narcissistic personality disorder: a pervasive pattern of grandiosity, need for admiration, and a lack of empathy.

and I realised that this is the type of personality, excessive aggrandisement, attention-seeking behaviour, a disregard for rules, and an overblown view of their capabilities, that I feel many of those funding startups are actively looking for. By funding those who do not 'play by the rules' and inflate their apparent valuations, investors are encouraging this behaviour and inflicting it on all of us.

Solutions
There are no definitive solutions to this - their will always be unethical leaders, especially when money and power are involved, but there are things that can be done to minimise their impact. Employees need to educate themselves as to the personality traits of such people, to know their rights, and be willing to walk away from any such positions. Investors need to take a more active role in selecting more 'reasonable' people to run companies, and to not reward such personalities through funding. Further, once funded, investors need to take a more active role in monitoring their companies, and understand that they can't claim no responsibility, that the actions of these companies are at least in part their fault. It's also in their own interest to do so - a few more stories like the ones above, and potential purchasers of their companies will be more and more wary of buying at a high valuation. Finally, agencies such as the SEC and State Attorneys General must actively enforce existing laws on startups and stop turning a blind eye to it - only once heavy fines are imposed, along with jailtime, will this truly be taken seriously. There seem to be some movement on that enforcement front, and some have been warning that at some point soon, at least one prominent startup CEO will end up in jail for their actions.

As a last point, I want to congratulate Penny Kim on writing about her experience and drawing attention to the abuse heaped on some employees that is rarely covered in the press. It's hard to bring this to light, and the spotlight that falls on you when you speak out can be intense - but the more people who do this, the more awareness is raised, and the harder it will be to happen to others.

6 comments:

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  2. Hi Paul,

    First off, love the blog. I found it back in April and have been checking in since. A lot of what you're saying rings true (although not with my current company - we're making actual things far away from self-driving cars or medical equipment, and I'm loving it).

    One thing you might be interested in: "Those other guys", or Energous, has as their main backer a fund, MDB Capital out of Santa Monica, that seems to have pulled the same thing multiple times in the past - hype a company based on a story, ride it as long as you can and then cash out. I'm guessing they might even profit both when it's going up and when it's (unavoidably) going down.

    Here: http://seekingalpha.com/article/2358075-watt-be-prepared-to-lose-all-of-your-investment

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    1. Thanks for that - sadly what gets talked about here is all too common at startups, but there are great companies out there too and it's good to hear you found one.

      I've followed the MDB Capital part of Energous, and I agree it does look like this is something they've pulled off before. I get the impression that Energous model is being run by people who know exactly what they are doing and are gaming the system to extract money as the main goal. They're really careful about what they say and the publicity they go after, giving just enough info in the right way to let others fill in the blanks, but without actually lying.

      There are some good commentators on Seeking Alpha, it can be pretty informative.

      At some point I'm going to get back to writing about Energous, it's just been difficult to get the time.

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    2. I was thinking of it in connection to what you were saying about founders being pushed to make less-than-credible statements about how big their companies and ideas will grow in order to get funding.

      With MDB, that behavior seems to have taken a big step further in the same direction, making those same claims to the public.

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  3. I'm predicting that most of the so-called Unicorns are out of business within the next 5 years, taking their investor money with them. Most of them look like scams to me. Only time will tell.

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