17 Of The Biggest Startup Frauds Of All Time – CB Insights Research


Move fast and break things — it’s the startup ethos. Here’s what happens when it goes wrong.

Few places are more receptive to new ideas and innovative business models than Silicon Valley.

A promising new idea — especially if it’s pitched by the right person — can essentially win an entrepreneur a blank check to bring their vision to life or help a fledgling venture fund land its all-important first investments.

But the model doesn’t always work perfectly.

 

From Theranos, the blood testing startup that never had even a glimmer of a truly working product (but still raised more than $700M) to Hampton Creek, the vegan mayo brand that was caught buying its own merchandise in bulk to inflate its sales numbers, the freedom and innovative energy of the Valley has, at times, been used to fuel a variety of startup scams and outright frauds.

There’s almost always an element of “fake it ’till you make it” for a successful, disruptive startup. Some companies just push their luck a little too far.

When that’s happened, some companies survive. Others are forced to rebrand in an attempt to distance themselves from the notoriety of their founders. And others disappear forever.

Below, we take a look at some of these frauds and the lessons they can teach entrepreneurs hoping to launch their own products, companies, and funds.

As these 17 companies discovered, it can be a slippery slope from rebellious nonconformity to brazen criminality.

Table of contents

  1. Theranos and the revolutionary blood tests that never existed
  2. Zenefits skirts compliance regulations
  3. The Honest Company not so honest about labeling
  4. Outcome Health fights for its life
  5. LendingClub founder violates own company’s business practices
  6. Mozido’s fintech fraud fiasco
  7. Hampton Creek busted buying its own merchandise
  8. Virgin Hyperloop One’s utopian vision derailed by fraud
  9. Rothenberg Ventures breaches ‘fiduciary duty’
  10. Skully founders face lawsuit over extravagant spending
  11. Bouxtie’s broken promises
  12. WrkRiot’s short-lived house of cards falls down
  13. Asenqua Ventures, the shell game disguised as a VC firm
  14. Crescent Ridge Capital Partners’ elaborate Ponzi scheme
  15. Autonomy: Big problems with big data
  16. Pixelon: Online video vaporware
  17. Pseudo: Entrepreneurship as performance art

1. Theranos and the revolutionary blood tests that never existed

Total Funding: $1.1B

Select Investors: Blue Cross Blue Shield Venture Partners, Fortress Investment Group

Failed blood-testing startup Theranos was one of the biggest startup frauds ever perpetuated.

Theranos had apparently accomplished what many hematologists had long thought was nigh-impossible: the company claimed to have developed a proprietary technology that allowed clinicians to test patients’ blood using a fraction of the blood volume required in typical hematological tests — between a hundredth to a thousandth less blood, if the company’s claims were to be believed.

The problem was that Theranos’ proprietary blood-testing technology was completely fictitious.

Theranos lied to investors, patients, and the press for years. CEO Elizabeth Holmes and the company falsified test results, misled partners about the capabilities of Theranos’ technologies, released incomplete devices that did not work as promised, and repeatedly denied accusations of wrongdoing in media appearances.

Holmes’ claims about Theranos’ blood-testing technology weren’t just exaggerations or selective interpretations of clinical research data; they were quite literally impossible.

Dr. Phyllis Gardner, a professor of medicine at Stanford University, warned Holmes about the flaws in her hypotheses, but Holmes ignored Gardner’s advice. It is extraordinarily difficult to achieve precise results from a fingertip pin-prick, and the results are highly unreliable. Such microscopic quantities of blood also yield very little reliable data — certainly not enough to be effective in the kinds of tests Holmes had promised.

The Outcome

After a comprehensive investigation by the Securities and Exchange Commission, Holmes was banned from the laboratory testing industry for two years and was ultimately charged with wire fraud by the Department of Justice in summer 2018. In September, Theranos informed investors of its intentions to formally shut down.

Holmes and former Theranos COO Balwani’s trial has been delayed due to arguments over the scope of trial evidence, currently estimated to comprise millions of pages of documents across more than 4 terabytes of data seized by law enforcement. Holmes and Balwani face fines of $2M each and up to 20 years in prison, and are also likely to be expected to pay restitution to the victims they defrauded.

2. Zenefits skirts compliance regulations

Total Funding: $584M

Select Investors: Khosla Ventures, Founders Fund, Fidelity

Few industries are as closely scrutinized as the commercial health insurance sector. Companies wishing to sell health insurance are required to comply with stringent state-by-state licensing requirements to ensure patient safety — and it was these compliance regulations that human-resources software provider Zenefits knowingly circumvented in 2016.

Under California state law, insurance brokers must complete a mandatory 52-hour pre-certification course to legally sell insurance in the state. Zenefits’ problems began when reports emerged that Zenefits’ brokers in California had been able to artificially inflate the number of hours logged in the state’s health insurance broker pre-certification program by using a tool known as “the Macro,” written by Zenefits’ former CEO, Parker Conrad.

Although Zenefits’ brokers still had to successfully pass their pre-certification exam, the Macro allowed brokers to remain logged into the system regardless of their activity. This meant that while Zenefits’ brokers had ostensibly passed the state requirements, the artificial number of training hours logged could have potentially disqualified hundreds of brokers from selling Zenefits plans in California.

In addition, regulators claimed that as many as 80% of insurance plans sold in Washington state by Zenefits reps were sold illegally by unlicensed brokers. The Macro was allegedly used from Zenefits’ inception in 2013 until the summer of 2015, when Zenefits’ board was first alerted to its use.

The Outcome

After initial reports began to circulate about the macro, Zenefits fired a number of sales team leads who had allegedly encouraged the use of the Macro among their brokers. In February 2016, Conrad stepped down and resigned his position as a company director. In 2017, Conrad settled with the Securities and Exchange Commission and agreed to pay $533,692 in penalties and interest. The SEC also levied a fine of $450,000 on Zenefits itself.

In an interesting example of Silicon Valley’s willingness to forgive past misdeeds, Conrad recently raised $45M in Series A funding for his latest startup, Rippling, in a round led by Kleiner Perkins.

3. The Honest Company not so honest about labeling

Total Funding: $490M

Select Investors: AllianceBernstein, Lightspeed Venture Partners, Glade Brook Capital Partners

Actress Jessica Alba founded The Honest Company in 2011 to offer consumers healthy, natural alternatives to heavily processed household goods such as cleansers and toiletries.

However, The Honest Company’s claims came under fire in 2017 when allegations were made that the company had engaged in fraudulent labeling of some of its products.

The Honest Company’s branding and promotional materials claimed that the firm’s goods were free of synthetic chemicals. However, independent tests of The Honest Company’s products, including its toothpaste, laundry detergents, and floor cleansers, all contained synthetic chemicals, some of which are known to be toxic.

The Outcome

The company denied all allegations, but agreed to change the way in which its products were labeled. The company paid $7.3M to settle the class-action suit.

4. Outcome Health fights for its life

Total Funding: $500M

Select Investors: CapitalG, Goldman Sachs Investment Partners, Pritzker Group Venture Capital

Rishi Shah and Shradha Agarwal founded healthcare information startup Outcome Health in 2006 while the pair were still studying at Illinois’ Northwestern University.

Outcome offers pharmaceutical companies advertising airtime on TVs and tablets that the company distributed to 40,000 clinicians’ offices across the US. Outcome’s screens, which doctors are not charged for, also display educational content.

Outcome’s product effectively monetized time spent waiting in doctors’ offices. However, Outcome utilized what prosecutors described as “fraudulent and false information” to encourage financiers to invest more money by selling advertising inventory for more screens than the company possessed. Shah and Agarwal denied all accusations.

Court documents showed that Goldman Sachs, one of Outcome’s largest investors, had conducted examinations of Outcome’s investment materials that allegedly inflated the success of advertisers’ campaigns in 10 separate case studies provided to Goldman as part of the company’s due diligence.

The Outcome

In January 2018, Outcome settled all pending lawsuits by the company’s investors on the condition that Shah and Agarwal step down from their leadership positions.

5. LendingClub founder violates own company’s business practices

Total Funding: $263M

Select Investors: BlackRock, Norwest Venture Partners, Sands Capital

LendingClub was one of many online lending services founded in the mid-2000s as entrepreneurs eyed the Byzantine financial sector as an area ripe for disruption.

Founded by Renaud Laplanche in 2006, LendingClub quickly became one of the largest online lenders in the US. However, the company’s growth was overshadowed by Laplanche’s unexpected resignation in 2016 following pressure from the company’s board.

Laplanche was forced out of LendingClub over the sale of roughly $22M in near-prime loans that were sold to a single investor. Details surrounding the trade are scant, but reports indicated that Laplanche had sold the loans in a way that directly contradicted investor instructions.

The Outcome

The sale itself had minimal impact on LendingClub’s business, but constituted a violation of the company’s business practices serious enough to warrant calls for Laplanche’s resignation. Laplanche would later settle with the SEC, but admitted to no wrongdoing. Laplanche was barred from participating in the securities industry for three years and also agreed to pay a fine of $200,000.

6. Mozido’s fintech fraud fiasco

Total Funding: $314M

Select Investors: MasterCard, Wellington Management

In 2014, mobile payments company Mozido was valued at $2.3B. The company wanted to develop white-labeled financial products for the 2B “unbanked” people around the world who can access mobile technology but lack a traditional bank account. Mozido had ambitious plans to revolutionize mobile payments in key markets including India, Africa, and southeast Asia.

However, fraud perpetuated by Mozido’s founder, Michael Liberty, overshadowed Mozido’s plans.

In 2018, the SEC indicted Liberty on charges of fraud, claiming that he had defrauded 200 investors from which he raised $55M . Liberty was accused of using a number of shell companies established between 2010 and 2017 to divert funds from investors to his personal accounts. Liberty was also accused of using funds to support his other business ventures, pay for interior decoration services for his ex wife, and pay a discouragement penalty levied against another of Liberty’s investment schemes by the SEC’s office in Philadelphia.

The Outcome

Liberty pled not guilty to 10 separate federal fraud charges in March 2019, and could face up to 20 years in prison. His trial is expected to commence in February 2020.

7. Hampton Creek busted buying its own merchandise

Total Funding: $240M

Select Investors: Khosla Ventures, Marc Benioff, Eduardo Saverin

Demonstrating sales is a necessity for retail startups, especially those operating in the intensely competitive food vertical. Weak sales can make it much harder for innovative food companies to secure additional investment and can jeopardize which stores carry certain products.

In 2016, vegan food products manufacturer Hampton Creek was accused of falsifying sales data after reports surfaced that the environmentally conscious food startup had employed a network of independent contractors who were instructed to secretly buy back Hampton Creek products from supermarkets across the United States.

At the heart of the scandal was Hampton Creek’s flagship product, a dairy-free mayonnaise called Just Mayo that was sold at Kroger, Safeway, and Walmart, among other retailers. Around eight months before Hampton Creek raised $90M in a Series C led by Horizons Ventures, the company instructed its contractors to buy back hundreds of jars of Just Mayo from supermarkets nationwide, creating the perception that the product was significantly more popular than it actually was.

In addition, contractors were allegedly instructed to contact regional supermarkets by phone to inquire about Hampton Creek products to further create the illusion of stronger consumer support for the new product lines.

The Outcome

Hampton Creek CEO Josh Tetrick later claimed the buy-back campaign was part of a broader effort to monitor product quality. However, few people were convinced by Tetrick’s explanations, pointing out that most quality assurance processes for most food products are conducted before the product leaves the factory.

Hampton Creek formally rebranded to Just in June 2017 and continues to sell its range of vegan dairy substitutes at retailers nationwide.

 

8. Virgin Hyperloop One’s utopian vision derailed by fraud

Total Funding: $472M

Select Investors: Caspian VC Partners, China Investment Corporation, Kaspar Ventures

Virgin Hyperloop One promised to transform the landscape of commercial public transportation.

The company’s principle technology, a variant of a concept introduced by Elon Musk in 2013, relies on linear electric motors to propel a magnetically levitated pod through a low-pressure tube at speeds of up to 760 mph. The technology functions similarly to that of maglev bullet trains currently in operation in Japan.

However, Hyperloop’s ambitious vision of the future of mass transit was met with a series of high-profile lawsuits alleging a range of misconduct at several levels of management across the company.

Hyperloop’s former CTO Brogan BamBrogan filed suit against Hyperloop along with three other former employees in 2016, claiming the company had violated numerous labor laws and breached its fiduciary responsibilities to investors. BamBrogan also alleged that he had personally suffered defamation, assault, and emotional distress during his tenure at the company. Hyperloop countersued, claiming that BamBrogan and the three additional plaintiffs had engaged in a failed coup of the company.

The Outcome

Unfortunately for Hyperloop, this wasn’t the end of the company’s woes. Cofounder Shervin Pishevar took a leave of absence in December 2017 after Bloomberg reported numerous claims of sexual misconduct that had been made against Pishevar. In addition, Ziyavudin Magomedov, a Russian billionaire who sat on Hyperloop’s board, was arrested in Moscow in 2018 on fraud and embezzlement charges. Although these charges were apparently unrelated to Hyperloop, Magomedov’s arrest was another black eye for the beleaguered company.

9. Rothenberg Ventures breaches ‘fiduciary duty’

Mark Rothenberg founded his venture fund, Rothenberg Ventures, to fund seed-stage tech startups across the Bay Area. Having invested in Elon Musk’s SpaceX and several virtual reality startups, Rothenberg Ventures had gained the confidence of many investors, and the future seemed bright for the new fund.

As it would turn out, that confidence was misplaced.

Rothenberg, whose reputation as the host of lavish Silicon Valley parties was widely known, allegedly used investor money to fund his extravagant lifestyle. Over the course of four years, Rothenberg reportedly spent investors’ money on extravagant indulgences such as hiring race car driver Collete Davis to appear with her car at promotional events, booking a Super Bowl suite to attract additional investors to his fund, and co-producing a music video for British rock band Coldplay.

The Outcome

Problems at Rothenberg came to a head in 2016 when a raft of senior executives left the firm , including the company’s finance director, CFO, general manager, and head of Rothenberg’s San Francisco office. The SEC alleged that Rothenberg had spent as much as $7M of his investors’ money on his personal lifestyle . Rothenberg admitted no wrongdoing during the SEC’s investigation, but ultimately stepped down from his role at the troubled firm in 2018.

10. Skully founders face lawsuit over extravagant spending

Total Funding: $13M

Select Investors: Eclipse Ventures, Intel Capital, Techstars

In 2014, Marcus and Mitch Weller caused quite a stir across Silicon Valley when they announced Skully, their augmented reality motorcycle helmet company.

Skully promised to develop a sophisticated motorcycle helmet called the AR-1 that would rely on AR technology to provide riders with a digital heads-up display (HUD) overlay that would inform the rider about road hazards, weather, and driving conditions, as well as offer a 180-degree blind-spot camera, among other features.

The Outcome

Skully raised more than $2.4M on IndieGoGo to develop the AR-1, but the company soon ran into trouble. Despite exceeding its fundraising target by almost 1000%, the company repeatedly pushed back the shipping date of the AR-1, blaming logistical difficulties and technical problems in initial production.

However, these claims were disputed by a former employee, Isabelle Faithauer, who filed suit against the Wellers. Faithauer’s suit alleged that the two brothers had spent much of the money raised on IndieGoGo on a range of luxurious purchases, including rent on their apartment in San Francisco’s Marina District, two Dodge Viper sports cars, four motorcycles, limousine rentals, and entertainment at a gentlemen’s club.

Faithauer ultimately dropped her suit against the Wellers, but Skully’s promising AR helmet prototype never did see the light of day.

11. Bouxtie’s broken promises

Total Funding: $2.5M

Select Investors: Plug and Play Ventures, RIT Venture Fund

Croatian-born entrepreneur Renato Libric had a singular vision: to disrupt America’s massive gift card market.

Libric’s startup, Bouxtie (pronounced “bow-tie”), offered consumers personalized digital gift cards to send to family and friends with custom messages and graphics.

After Libric raised a few million dollars to grow the platform, it later came to light that he had engaged in a series of elaborate deceptions to convince investors to continue bankrolling his company.

To create the illusion of a successful, attractive startup, Libric resorted to a range of methods to inflate his company’s financial health. Libric falsified signatures on checks to give investors the impression that a public corporation was courting Bouxtie with an acquisition offer. Libric also forged multiple signatures of Bouxtie’s board of directors to acquire a “loan” from a Las Vegas company that had previous invested in the company. Libric intended to subsequently convert the illegally acquired funds into Bouxtie shares.

The Outcome

Libric was sentenced to 3 years after pleading guilty to charges of defrauding an investor of $1.5M.

12. WrkRiot’s short-lived house of cards falls down

Total Funding: $1.1M

Select Investors: Isaac Choi, Paul Kim

Sometimes, looking and acting the part of the ambitious entrepreneur is as important as a business idea itself. However, there’s difference between acting confidently and believing in yourself, and actively constructing an elaborate alter-ego to convince earnest investors to part with their money. This is one lesson that defunct job board site WrkRiot founder Isaac Choi learned firsthand when the site closed down after a series of scandals left the company’s reputation in tatters.

WrkRiot, which was formerly known as 1for.one and JobSonic, was founded by Choi in 2015. Later it was revealed that Choi had engaged in numerous deceptions for some time after founding his company.

WrkRiot’s problems began when Penny Kim, a former employee, published a post on Medium titled, “I Got Scammed by a Silicon Valley Startup,” outlining her experiences with Choi and WrkRiot and accusing the company of fraud. Following the publication of Kim’s post, investors began investigating Choi and his company — and soon the FBI joined them.

The Outcome

In June 2017, the Department of Justice confirmed that Choi had been indicted on numerous charges.

In a statement summarizing the results of its investigation, the Department of Justice said that Choi “falsely claimed that he received a degree from a prestigious New York business school, worked as an analyst at a major financial institution, had access to significant personal wealth, and was investing significant amounts of that money into the company. The indictment further alleges that after certain WrkRiot employees came to learn that WrkRiot’s bank accounts did not contain the capital that Choi claimed to have invested, Choi falsely claimed that a significant portion of the money he pledged to invest was tied up overseas and elsewhere.”

Choi pled guilty to all charges in February 2018, and was sentenced in May 2018. Although Choi’s crimes carried a potential sentence of up to 20 years in federal prison, Choi’s sentence was reduced to time served .

13. Asenqua Ventures, the shell game disguised as a VC firm

In 2001, MIT alumnus Albert Hu founded a venture fund called Asenqua Ventures. Hu had convinced several individual investors to invest a total of around $5M in a variety of technology companies through what Hu described as a “hedge-fund strategy.”

Four years later in 2005, Hu claimed he needed to relocate Asenqua to Singapore, citing vague tax and privacy reasons for doing so. By this point, Hu’s deceptions were beginning to catch up to him, and in 2009, Hu was extradited from Hong Kong to the United States to face seven individual counts of wire fraud. Hu was found guilty and sentenced to 12 years in prison.

The Outcome

In most scams, this would be the end of the story. However, Asenqua resurfaced in 2015, boasting a new website and another entity known as Asenqua Financial Advisors, Inc. Hu’s name was notably absent from the new site, but several of the executives who were listed on Asenqua’s new web presence also turned out to be fictional. (Managing Director Peter Arnold’s LinkedIn profile, for example, was copied almost word-for-word from the profile of late media financier Russell Armstrong, who died in 2011.) Several other executives had similarly suspicious online profiles.

As of this writing, Asenqua’s site remains live. In addition to supporting “a diverse array of financial engagements, including mergers and acquisitions, leveraged buyouts, restructurings, recapitalizations, and capital formation,” Asenqua also appears to offer auto insurance pricing comparison advice as well as practical recommendations on how to protect your car from hail damage.

14. Crescent Ridge Capital Partners’ elaborate Ponzi scheme

Tamer Moumen, founder of Crescent Ridge Capital Partners, had perfected his fraudulent elevator pitch over many years of practice.

Between 2012 and 2017, Moumen defrauded more than 50 individual clients by encouraging them to liquidate their financial assets and invest in his hedge fund. Moumen’s carefully crafted persona was highly convincing. Moumen told investors that Crescent Ridge was managing tens of millions of dollars of investment capital for its clients, that he routinely exceeded the S&P 500’s expectations thanks to his years of experience as a successful trader.

In reality, Moumen had zero experience managing a hedge fund, had a long history of losing money in the securities market, and had used investors’ money to finance his lavish personal lifestyle. Court documents later revealed that Moumen had used his investors’ commitments to purchase a $1M home in Leesburg, Virginia, and a new Tesla.

However, investors were not Moumen’s only targets. In September 2015, Moumen launched a GoFundMe campaign ostensibly intended to help aid organizations providing humanitarian aid to Syrian refugees. The campaign raised more than $30,000 before vanishing from GoFundMe’s site, and the Department of Justice later confirmed that Moumen had redirected funds earmarked for the campaign to his personal accounts.

The Outcome

Moumen pled guilty to charges of wire fraud on May 12, 2017. He was sentenced to 10 years in prison and ordered to pay $7.5M in restitution to his victims.

 

15. Autonomy: Big problems with big data

Total Funding: N/A

Select Investors: Hewlett-Packard (acquirer)

When Mike Lynch founded Autonomy Corporation in Cambridge, England in 1996, he had bold visions of becoming one of the largest software companies in the United Kingdom.

Autonomy specialized in software designed to analyze large quantities of unstructured data, such as information contained within emails, documents, and instant messages, which is fundamentally different from data presented in structured formats such as the rows and columns of a spreadsheet. Working with researchers at the University of Cambridge, Autonomy pioneered a range of enterprise search technologies built upon adaptive pattern recognition techniques that would later become commonplace as big data became integral to the enterprise.

Lynch’s relentless focus on growth drove Autonomy to new heights of growth. The company soon became among the largest software firms in Great Britain, and in 2011, American computing giant Hewlett-Packard announced it was acquired Autonomy for $11.7B — a 59% premium over Autonomy’s average share price for the previous year.

During a call with analysts shortly after the announcement, former HP CEO Leo Apotheker defended his decision to purchase Autonomy for such a steep price.

Unfortunately for Apotheker, the price HP paid for Autonomy was the least of the company’s problems.

In April 2012, Lynch left Autonomy due to alleged cultural differences between HP and Autonomy. Although HP’s then-CEO Meg Whitman attempted to downplay Lynch’s departure, it soon emerged that a number of Autonomy’s executive team had left the company within a year of the HP acquisition, including President Sushovan Hussein, CFO Steve Chamberlain, CTO Pete Menell, and CMO Nicole Eagan.

A little more than 6 months later, HP wrote down approximately $8.8B when the company discovered “serious accounting improprieties” at Autonomy. HP alleged that Autonomy had purposefully inflated its assets and misrepresented key transactions to make the company a more attractive acquisition prospect. It also emerged that HP had conducted a mere 6 hours of due diligence into Autonomy prior to the acquisition, in a process consisting of just 4 90-minute conference calls.

The Outcome

The US Department of Justice and the SEC began separate inquiries into HP’s acquisition of Autonomy shortly after HP wrote down most of its debt from the purchase. In March 2013, Great Britain’s Serious Fraud Office launched its own investigation.

In March 2015, Lynch and other members of Autonomy’s former executive team countersued HP in Great Britain for more than £100M, alleging that HP’s actions amounted to a “smear campaign.” This sparked a back-and-forth legal battle on both sides of the Atlantic that ultimately culminated in Autonomy financial chief Shushovan Hussain being charged with and convicted of fraud. Hussain was ordered to repay the $7.7M in profits that he had personally gained as a result of Autonomy’s sale to HP. In May 2019, he was sentenced to 5 years in prison for fraud.

Lynch was also facing additional charges of securities fraud in the United States as of March 2019. Lynch, who denies all wrongdoing, faces a potential sentence of up to 25 years. He was also named in 17 additional charges of conspiracy and wire fraud.

16. Pixelon: Online video vaporware

Total Funding: N/A

Select Investors: N/A

Although there are dozens of cautionary tales from the dot-com bubble heydays in the late ’90s and early 2000s, few are as brazen as that of Pixelon, the online video company that couldn’t stream online video, and that was founded by a known fugitive under an assumed identity.

Pixelon was founded in San Juan Capistrano, California, in 1998 by an individual who called himself Michael Fenne. In actual fact, Fenne was the alias of David Kim Stanley, a convicted felon and known con artist who had been on the run for two years, since skipping bail in Virginia on charges that he defrauded elderly investors of more than $1M in the late 1980s.

Many of Stanley’s victims were parishioners at the church where his father had served as pastor, and Stanley had been sentenced to a maximum of 36 years in prison for his crimes, with 28 years of that sentence suspended.

Shortly after arriving in California in 1996, Stanley wasted little time in pitching his new venture to prospective investors. After attracting around $30M in investment funding, Stanley spent $12M to throw a lavish launch party for Pixelon at the MGM Grand Casino in Las Vegas. The party, which was billed as the iBash ’99, featured a range of prominent musicians and performers, including KISS, the Dixie Chicks, Tony Bennet, Sugar Ray, and a special reunion concert by seminal British rock band The Who.

The event was supposed to be streamed live as a demonstration of Pixelon’s technology. However, Pixelon’s livestream of the event served error messages to most viewers, and most were forced to rely on streaming software from Microsoft to watch the broadcast. The incident prompted many of Pixelon’s investors to examine the company’s technologies more closely, shortly after which evidence of Stanley’s deceptions first came to light.

The Outcome

In April 2000, Stanley surrendered to authorities. Shortly afterward, the company laid off the majority of its 55-person workforce. In June 2000, Pixelon dismissed the remainder of its executive team and filed for Chapter 11 protections.

Despite the gravity of Stanley’s various offenses and the spectacular failure of Pixelon as a company, Stanley quickly faded from public view shortly after his arrest. His current whereabouts are unknown.

17. Pseudo: Entrepreneurship as performance art

Total Funding: N/A

Select Investors: N/A

The world of tech entrepreneurship often attracts eccentric, visionary founders who see the world somewhat differently than the rest of us. Case in point, serial internet entrepreneur Josh Harris, founder of webcasting and internet TV site, Pseudo.com.

Like many of the now-defunct companies that formed during the lead-up to the dot-com crash of the early 2000s, Pseudo.com was remarkably prescient.

Long before livestreaming became commonplace, Pseudo pioneered real-time webcasting from its studio offices in New York City. Harris correctly predicted everything from user-generated content to the phenomenon of regular people sharing the most intimate details of their lives via online video, and leveraged both in his webcasting endeavor. The founder, who was frequently heralded as a modern-day Andy Warhol, also invited actors, musicians, artists, and performers to produce content for Pseudo, and Pseudo’s parties soon became legendary in SoHo and beyond.

For all Pseudo’s genuine innovation, the company shared the fate of many dot-com-era startups that ultimately failed to survive the crash. However, the real twist came in 2008, eight years after Pseudo formally closed forever, when Harris admitted that Pseudo had been a fake company from the very start.

According to him, Pseudo was “the linchpin of a long form piece of performance art.”

The Outcome

Not everyone associated with Pseudo.com agrees with Harris’ depiction of the company as nothing more than a years-long performance art project. Stephanie Bergman, who claimed to be a former Pseudo employee, disputed Harris’ version of events in a blog post detailing her experiences working at the startup.

Bergman claimed that executive mismanagement, not the site itself, was to blame for Pseudo’s failure. She cited the lack of a clearly defined business model, chronic overspending on frivolous luxuries, and an extremely permissive culture of limitless personal expense accounts as contributing factors in Pseudo’s eventual downfall.

Whether Harris is being truthful in his claims about the nature of Pseudo, the company was a legitimate business venture, at least on paper. The majority of Pseudo’s assets were liquidated in 2000, with the remnants of Harris’ company being acquired by New York-based internet company INTV for $2M.

via CB Insights Research http://bit.ly/2VHWvze