Venture Capitalists Critique IRL's Admission of Fake Users After Raising $200M: 'Inexcusable'

IRL, the App Unicorn with Fake Users: VC Weigh In on the Inexcusable

IRL, a messaging app startup that once reached a valuation of $1 billion, recently announced its shutdown after admitting that 95% of its users were fake. The fallout from this revelation has sparked discussions among venture capitalists (VCs) who are questioning the due diligence process that allowed this situation to occur.

IRL became a unicorn company, with a valuation over $1 billion, following a $170 million Series C funding round led by SoftBank Vision Fund 2. Despite suspicions of inflated user numbers, the startup received funding totaling over $200 million from various prominent investors. VCs now emphasize the importance of thorough due diligence, including off-sheet references and verifying data accuracy.

Chamath Palihapitiya, founder of VC firm Social Capital, expressed concerns about insufficient checks and balances, inexperienced VCs, and the need for difficult conversations during the investment process. VCs also highlighted the impact of the size of funds like the SoftBank Vision Fund, which can lead to bigger mistakes due to the pressure to deploy capital.

This incident serves as a reminder for VCs and startups alike to prioritize rigorous due diligence, conflict resolution, and transparent communication. It also underscores the ongoing challenges in

Reflecting on the Importance of Thorough Due Diligence in the Wake of IRL's Fake User Scandal


IRL's rise and fall as a messaging app startup with fake users has raised concerns among venture capitalists (VCs) regarding the due diligence process that allowed such a situation to occur. Despite reaching a valuation of $1 billion and securing significant funding, IRL admitted that 95% of its users were fake, leading to the company's eventual shutdown. This revelation has prompted VCs to reflect on the importance of thorough due diligence and the need for challenging conversations during the investment process.

One key issue highlighted by VCs is the lack of checks and balances in the due diligence process. Chamath Palihapitiya, founder of VC firm Social Capital, criticized the inexperience of some VCs, stating that they either do not know how to ask the right questions or lack the courage to address difficult issues. This lack of thoroughness in due diligence can lead to inexcusable mistakes, as seen in the case of IRL.

Transparency and accurate data were also emphasized by VCs as integral components of due diligence. Jason Calacanis, an angel investor, highlighted the importance of verifying the accuracy of data provided by founders. David Sacks, a general partner at Craft Ventures, stressed the significance of conducting off-sheet references, talking to customers independent of the company's influence, to ensure an unbiased assessment.

Summing it up


The size of funds, such as the SoftBank Vision Fund, also came under scrutiny from VCs. The immense capital available in these funds can put pressure on investors to deploy large sums of money, potentially leading to bigger mistakes. The need for conflict and challenging conversations during the investment process was emphasized as essential for making informed decisions.

In conclusion, the IRL incident serves as a wake-up call for VCs and startups alike to prioritize rigorous due diligence, conflict resolution, and transparent communication. Thorough checks and balances, off-sheet references, and accurate data verification are crucial in avoiding scenarios like IRL's downfall. VCs must ensure that they ask the right questions and have the courage to address difficult issues during the investment process. Additionally, the size of funds, such as the SoftBank Vision Fund, should not overshadow the need for diligent assessment and decision-making. By learning from this experience, the venture capital community can work towards a more robust and trustworthy investment landscape. Ultimately, the goal is to foster a culture of accountability, transparency, and integrity within the startup ecosystem.


Originally Published at: https://fortune.com/2023/07/02/venture-capitalists-on-irl-social-app-startup-failture-fake-users-softbank-funding/
Business Topic: Technology