SoftBank’s Vision Fund has taken legal action against the founders of social media startup IRL, a former portfolio company, after discovering gross misrepresentations about user numbers and activity. The lawsuit, filed in San Francisco, draws attention to the increasing importance of in-depth due diligence before investing in startups.
Allegations Against IRL
Founded in April 2021, IRL was promoted as a rapidly growing social media application, predominantly catering to Generation Z. SoftBank’s investment was fueled by the app’s low cost and its strong user engagement, which many believed could match the growth trajectory of platforms like Facebook and Twitter. In May 2021, SoftBank injected $150 million into IRL, comprising $125 million for company shares and an additional $25 million for insider shares. The complaint alleges deceit by IRL founders, including CEO Abraham Shafi, Noah Shafi, and Yassin Aniss, insinuating that they had over 12 million active monthly users.
Truth Unveiled
SoftBank’s complaint reveals that IRL allegedly used bots to create the illusion of a bustling social network, ostensibly to defraud potential investors. This cover was blown wide open when the U.S. Securities and Exchange Commission initiated an inquiry into IRL in 2022, leading to CEO Abraham Shafi’s suspension in April 2023 and the company’s dissolution by June 2023. SoftBank’s trust in IRL’s reported metrics, despite a third-party assessment that challenged these figures, raises questions about SoftBank’s diligence processes. When confronted, Shafi’s justification was deemed acceptable by SoftBank’s team.
Additional Points of Concern
SoftBank’s lawsuit points out that despite IRL’s assertions, a significant proportion of their “active users” were in fact bots. IRL’s expenses, to the tune of $50,000 per month per actual user, coupled with their bot-reliant strategy, underscore the company’s deception. IRL’s internal investigation determined that a staggering 95% of its users were fake. The app’s claim of being downloaded by 25% of U.S. teens under 28 and having a growth rate of 400% year-over-year was found to be far from the truth. IRL had additionally hired a covert firm, led by its head of Growth, paying it vast sums to continue this deception.
The Bigger Picture
This isn’t SoftBank’s first brush with questionable investments. Previous controversial associations include crypto exchange FTX and the property company WeWork. SoftBank’s Vision Funds witnessed a decline post the market highs of 2021, with a reported loss of $32 billion for the fiscal year concluding in March 2023. The ongoing SEC investigation into IRL will play a crucial role in shaping future investment strategies and practices within the tech industry.
Conclusion
The unfolding SoftBank-IRL lawsuit emphasizes the critical nature of thorough due diligence for investors. Companies, especially within the tech sector, must ensure transparent and accurate representation of their metrics and growth to foster trust. As the tech landscape continually transforms, investors are reminded of the inherent risks and the value of being meticulously cautious.
The repercussions of this lawsuit could extend beyond just SoftBank and IRL. It could set a precedent for how other similar cases are dealt with in the future. Investors might become more cautious, possibly making it harder for genuine startups to secure funding. On the other hand, it could lead to a cleaner investment environment where inflated claims are scrutinized, and genuine innovations are rewarded.
