Thursday, April 18, 2024

SoftBank is suing portfolio company IRL after it admitted 95% of its users were fake. VCs are stressing the need for ‘uncomfortable’ due diligence

Must read

Two years ago, a messaging app startup called IRL seemed to be riding high. It boasted of its “unicorn” status, having hit a $1.2 billion valuation in a $170 million Series C funding round led by SoftBank Vision Fund 2.

“We have the opportunity to build WeChat for the rest of the world,” Shafi told The Verge in 2021, referring to the messaging app in China that has more than a billion users.

Today, SoftBank is suing IRL for $150 million after the startup’s board concluded that 95% of the company’s users were fake, or “from bots.” IRL said it was shutting down. Its website now has the words “We loved doing more together on IRL.com,” along with a notice that “IRL has shut down.” 

SoftBank alleges IRL used a proxy service to inflate users data with bots and hired a firm to cover up the scheme. Its complaint states: “Because IRL did not have any profitable revenue stream, its value to an outside investor like SoftBank depended on its active user metrics as a source of potential future income. Thus, SoftBank relied on the accuracy of representations from IRL’s executives concerning both the quantity and quality of IRL’s users.”

On a recent All-In podcast episode, venture capitalists gave their thoughts on SoftBank’s IRL woes and the need for strong due diligence. 

“The number one part of diligence, I’d say for us—other than looking at metrics, which anyone can do—is the off-sheet references: talking to customers from a list that you figured out yourself, not from the company itself,” said David Sacks, a general partner at Craft Ventures.

Chamath Palihapitiya, who founded the VC firm Social Capital in 2011, pointed to insufficient checks and balances and what he considers “deeply inexperienced” VCs, who he said “don’t even know how to ask the basic questions or—even more insidiously—you don’t have the courage to say the hard thing. And so these things happen that are frankly inexcusable.”

Angel investor Jason Calacanis added that a key VC role is “asking uncomfortable questions and doing uncomfortable diligence … You can trust the founders, but you have to verify that the data you have is correct.”

Fortune reached out to SoftBank for comment but received no immediate reply.

In May, SoftBank posted record investment losses of nearly $40 billion in its tech-heavy Vision funds. It also went into what founder Masayoshi Son called “defense mode,” halting new investments by the funds.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

More articles

Latest article