I’m certain we’ve all read articles on TechCrunch or Mashable at one time or another. For many, it’s hard to not pay attention to the daily announcements of companies and their funding amounts. Of course it’s not just those two sites, but many more. Regardless of an entrepreneur’s age, for some this becomes a prime focus. There’s a concentration on money and not just for fundraising’s sake, with the allure of several million dollars. Some people begin making plans for personal spending with diminishing focus on what’s best for business. Others still have a great vision and steady plans for their company, but decide the term “by any means” fits during fundraising. Neither scenario is in the best interest of the company, but I’ll explain further.
Over the past decade or so there have been plenty of published stories about excessive salaries and embezzlement, but rarely do we hear of startups faking traction. The formula for a great pitch whether it’s VC, Angel or other, will always include traction. This is because it shows your company has engaged users, members, customers or whatever the case may be with your respective business. What this says is that you have more than an idea, that you’ve already put plans into action and have proof that plenty of people support your idea. Having a following is usually a crucial step in getting funded, with the exception of EIR programs, etc. Being that, many have found ways to speed up their funding process by creating falsified-traction. How, you ask? It’s similar to Twitter bots I suppose. One of the simplest methods I’ve observed has been fake user profiles.
Fake profiles give the appearance of a following that is larger than reality and it’s often expected that both other users and investors won’t be able to tell the difference. After all, who actually sits down and clicks through every profile? Or at the least, who sits down and clicks through every page of content on a website? Not many, but I do. I sit, click, engage and wait to see responses. Sometimes I’ve even compared responses and profiles for similar language and expressions. Other times, it has been a matter of checking account details which are non-existent combined with either no pic or low quality pics of the user.
The first entrepreneur I confirmed this with was in Hollywood, Florida in 2007. I was well acquainted with him as I’d spent plenty of evenings at his home with his family and friends. He’d launched several startups throughout his career and at the time had created a dating site, then a string of dating sites. All of which were populated with about 80-90% of fake users and profile accounts. When asked why, he simply said that it make it look as if they have more people on the sites. A little more than a year later I moved from sunny South Florida and decided to check up on the ol’ chap. Within about a year of its inception, the dating site receiving 10M dollars in funding from a single VC firm based out of Newport Beach and NYC.
This entrepreneur trudged along for 2 more years of paying overly high salaries to bad hires, advertisers and designers. He said he was focusing on scaling up, naturally. The problem that he eventually realized is that his community was not engaging, nor would it ever be. He’d spent his time paying people for services and paying to create thousands upon thousands of fake user profiles. What he forgot to pay, was to pay attention to actual (“real”) customers/members. The real people using the site would quickly stop, simply because the fake users weren’t engaging them. This guy would find that his site, who’s business model was based off paid memberships, would barely bring in 100K annually and that his investors would be on his back for the coming years because of it. His hair has now went from black to completely gray in that short amount of time. He’d eventually push for an IPO which at the moment, has been about an 8-9 month stretch.
Not every company that creates fake traction will experience this, but it’s a tale of caution nonetheless. As entrepreneurs we all see different opportunities and different possibilities to achieve results. There’s never one road to get to where you’re going, but the main focus should always be creating some sort of value for the customer. If they don’t see the value or the attempt to create it, they leave. Like a customer at a restaurant, it’s not much different. Bad service = No tip, bad review or worse, non-reoccurring customers. And if you don’t have anyone else in your restaurant, new customers will get suspicious if the food is any good. The situation can be applied to just about any industry with a few tweaks to the scenario, but I’ll leave the choice up to you. Will you take the easy way of “creating” traction in order to be funded, or will you be a real entrepreneur and do things the hard way by building a following with actual people?
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This entry was posted on Monday, June 25th, 2012 at 2:07 pm and is filed under Business Education, Entrepreneur Inspiration. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.