We admit we can get caught up in the hype about a new startup that looks like it's going to be a major disruptor and make its founder(s) billions. Theranos and WeWork are two prime examples. We've lauded Elizabeth Holmes and Adam Neumann for their brilliance and chutzpah. We put them on a pedestal. We called them the next Steve Jobs or Elon Musk. And then we watched as their empires catastrophically unraveled.
While Holmes and Neumann are two of the highest-profile entrepreneurs to crash and burn, they are far from the only ones to suffer this fate. All five of these former tycoons have fallen (for now, we do expect to hear from at least some of them again!). They had big ideas and enough conviction and charisma to land millions and billions in investments.
Here are Five Tech Founders Who Fell From Grace
Trevor Milton – Founder, Nikola
Trevor Milton was hailed as the next Elon Musk due to his one red-hot electric truck maker Nikola. In September 2020, it was revealed that Milton had faked the technology behind its semis. He also allegedly lied about having proprietary battery technology, hydrogen production facilities, solar panels, and natural gas wells. But what about that viral video that went around of a Nikola truck being driven? It turns out that was a prototype that was filmed rolling down a hill to make it look like it was moving forward on its own. Milton stepped down even though the company has yet to admit to any wrongdoing. In the wake, GM backed out of the $2 billion deal it had entered into with Nikola. The Department of Justice and SEC have issued subpoenas to Milton and Nikola.
Danielle Fong – Co-founder and Chief Scientist of LightSail Energy
Danielle Fong's LightSail was a clean energy startup that claimed it could provide large-scale energy storage via compressed air. This was lauded as no one else had even come close to solving this particular problem. Bill Gates, Peter Thiel, and Vinod Khosla all invested in Fong's idea…and that's what it turned out to be, just an idea. LightSail never got its energy storage system off the ground. Employees of LightSail detailed Fong's lavish spending and $225,000 salary. She was reportedly never in the office. By 2017, LightSail was out of money.
Adam Rogas – Co-founder, CEO NS8
Adam Rogas' NS8 called itself a fraud prevention and detection platform. However, it turns out that Rogas faked financial documents to make it appear as if the company had turned a big profit. He allegedly used those documents to get more money from investors. He raised $17.5 million and allegedly kept it all for himself. Â In September, the FBI and SEC filed the allegations of fraud against Rogas and he was arrested. He faces up to 45 years in prison.
Elizabeth Holmes, founder, and CEO of Theranos (Photo by Andrew Burton/Getty Images)
Elizabeth Holmes, Founder, and CEO, Theranos
Elizabeth Holmes and Theranos are the most infamous case of a fall from grace in the startup world. She dropped out of Stanford to found Theranos, which purported to revolutionize the way blood tests were done. One simple drop of blood pricked from a finger could diagnose a myriad of diseases and conditions. Or so Holmes claimed. Theranos was at one point valued at $10 billion. The problem was, it was a sham. Holmes' revolutionary blood test didn't work. Theranos ended up relying on traditional blood tests. The SEC charged Holmes and Theranos President Sunny Balwani with wire fraud. Holmes is awaiting trial in March 2021. She could face up to 20 years in prison. A book was written about her. A movie was made of that book. She's become a cautionary tale.
Adam Neumann, Co-founder and CEO WeWork
Adam Neumann started just fine. His company WeWork grew rapidly. However, along the way, he did a number of less than ideal things, like buy buildings he then rented back to WeWork. He also ran a bit of a crazy office. Back in the summer of 2018, Neuman reportedly bought so much alcohol for a company retreat that the bill for it would cover the full salary of an entry-level staffer. The book, "Billion Dollar Loser: The Epic Rise and Fall of WeWork" is by Reeves Wiedeman. One of the episodes described in the book is a three-day company retreat in London. Neuman hired Deepak Chopra to give a motivational speech and alt-rock singer Lorde to perform. WeWork employees slept in tents on air mattresses. But not Neumann and his wife, Rebekah Paltrow Neumann. They were in what is described as a "tent-house suite" that had heating and A/C, a king-sized actual bed, four twin beds, a number of refrigerators, and eight picnic tables.
Let's not forget the time Neumann compared WeWork to a rare jewel in an interview with Fast Company. At that time he said: "Do you know how long it takes?" He was implying how long it takes for a diamond to be created. The Wall Street Journal wrote about Neumann's management style, describing alcohol-fueled parties for their staff and Adam's decision to ban meat from the WeWork offices despite the fact that he is not a vegan or vegetarian. One time in 2016, Neumann laid off 7% of the staff in a somber all hands on deck meeting about cutting costs. Moments later waiters carried trays of tequila shots into the room and Darryl McDaniels of Run DMC played a set for the assembled staff.
When WeWork was poised to make its IPO in September 2019, the company was seeking a valuation of $47 billion. Just a few months later, the valuation was just $8 billion. The company lost $1.9 billion in 2018, alone.
Dishonorable Mention:
Billy McFarland – CEO Fyre Media
No list of startups gone wrong would be complete without mentioning Billy McFarland and the wild saga of the Fyre Festival. While technically not a tech startup, he must be mentioned. McFarland claimed he was throwing the music festival to end all music festivals in the Bahamas. Influencers and those who wanted to be influencers flew into the largely uninhabited island for the weekend of their dreams. They expected villas and gourmet catering. They got cold cheese sandwiches and FEMA tents. Nothing McFarland promised ticket holders actually happened. McFarland managed to scam more than $26 million from people obsessed with their image in the months leading up to the collapse of the Fyre Festival. One man in his 50s was hit so hard by McFarland's scam, that he testified at the trial that he and his wife could no longer retire after McFarland conned them out of their life savings. Now, it has surfaced that McFarland raised all of those millions using forged documents.
A 2018 SEC filing against McFarland stated, "In 2016 and 2017, the felon raised about $7.9 million from at least 43 investors in the Fyre Media offerings and approximately $16.5 million from at least 59 investors in the Fyre Festival offerings."
McFarland scammed the money by lying about key Fyre Media and Fyre Festival financial details and assets. He falsely claimed he had $100 million in bookings with Jennifer Lopez, Drake, Foo Fighters, and Selena Gomez. He created a fake brokerage statement to back up his claim that he had the personal collateral to secure the money from investors and banks. He showed an investor a Scottrade balance sheet reflecting that he owned 18,000 shares of Facebook at $142.05 a share for a total of $2.565 million. In reality, McFarland had less than $1,500 worth of Facebook shares.
He used these false documents to ensure a return on investment to one man who gave him $700,000 in the three months leading up to the Fyre Festival. Another investor gave McFarland $500,000, because the records he was shown led him to believe it was a sound investment. McFarland provided investors with a chart claiming that Fyre Media had $4.5 million in cash and cash equivalents as well as $18 million in accounts receivable. He also claimed the company owned an island in the Bahamas worth $8.4 million. In reality, Fyre Media had less than $40,000 in cash and did not own an island.
Investors also received a projection sheet that showed the company's total revenue would be just short of $1 billion by the end of 2017. That revenue would come, in part, from the money made from bookings with Drake, Kendrick Lamar, and Chance the Rapper. McFarland boldly claimed that his company was netting 10% of the money made for private events booked through the Fyre app. Drake was listed as $81.1 million, Kendrick Lamar at $28.35 million, and Chance the Rapper at $17.28 million.
McFarland also provided a report to investors showing that Fyre Media had 15 accepted bookings totaling $5.4 million. This report claimed to have accepted offers from Jennifer Lopez for $1.75 million, the Foo Fighters for $1.5 million, and Selena Gomez for $1 million.
Text messages also show that he promised one investor a 120% return four months after receiving a wire transfer for $200,000. He promised another investor the same 120% return on his $700,000 investment just two months before the disastrous festival.
All in, Billy McFarland scammed $27.4 million from the Fyre Festival's investors. Where did that money go? Certainly not to catering, villas, or the bands.
Billy McFarland, 28, is currently serving a six-year prison sentence and has been ordered to repay $26 million of the money he obtained fraudulently.
