This Startup Raised $30 Million. Now, Its Founder Is Accused of Fraud.
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This story originally appeared on Entrepreneur en Español.
On Thursday, Oct. 4, 2018, a tweet that supposedly came from the employees of Mexican startup Yogome announced that its 150 workers were on the 17th floor of the iconic Torre Latinoamericana building in Mexico City being forced to sign their resignations.
Hola, estamos en la torre latino piso 17, en lo que queda de #yogome, los abogados nos estan obligando a renunciar, y hay guardias que se aseguran que lo hagas para darte acceso de salida— empleados de yogome (@DeYogome) October 4, 2018
Soon after, Forbes Mexico published an article that claimed that the company closed its doors because one of its founders, Manolo Díaz, was accused of fraud.
The news shook the entire Latin American business ecosystem, because Yogome was, for all intents and purposes, one of the most successful Mexican startups in recent years. Its story was fantastic: Manolo Díaz and his partner Alberto Colín (who seems not to be involved in the fraud accusations) were two entrepreneurs from the central Mexican city of San Luis Potosí who opened a videogame company to educate children around the globe. Less than 10 years later, their content was available in six languages (English, Portuguese, Chinese, Spanish, Japanese and Korean) and reached 30 countries.
This educational technology (EdTech) startup became a kind of standard for many companies that wanted to be successful outside Latin America because between 2013 and 2017 Yogome had managed to raise more than $30 million in funds and seed capital in Mexico, as well as in Silicon Valley.
But according to a source that spoke to Forbes Mexico, Manolo Díaz had faked the numbers of his company to deceive investors and the market in general.
"Investors always have controls such as corporate governance in the companies in which they invest, but in this case there was no way for the capital partners to have realized that something bad was happening because the deception was very sophisticated," said Luis Antonio Márquez, director of the Center for Innovation and Entrepreneurship at EGADE Business School.
According to anonymous sources quoted in the business website Expansión, Manolo Díaz manipulated the information he shared with his investors, partners and workers, changing through a bot the data that the App Store showed about the downloads and revenues of its games. An employee of Yogome revealed his suspicions to an investor during a company party and that triggered the investigation that ended with the closing of the company.
Daniel Santamarina, managing partner of the investment fund Dux Capital of Startup Mexico, said that investors need to do due diligence to analyze factors such as product, market and more important -- especially in the early stages of a company -- the team that comprises the startup. "This includes audits on fiscal and legal matters, the search for any ‘skeletons in the closet’ of the entrepreneur," Santamarina said in an interview with Entrepreneur en Español. "The type of fraud that happened in Yogome forces us to take more rigorous preventive measures before making an investment.”
A global issue
Although the case of Yogome has been one of the most discussed among Latin American business sector in recent years, it is not (by far) the only one in which a company manipulates its figures and information. In fact, this type of situation occurs in the most advanced entrepreneurial environments.
This is what happened with Theranos, a company valued at $9 billion that promised to perform more than 50 types of medical diagnoses through a home test that required only a drop of blood from a finger. Founder Elizabeth Holmes allegedly lied about the true capabilities of her laboratory.
"Cases like these go beyond the entrepreneurial ecosystem of a country," said Juan Alberto González, director of the Center for Innovation and Entrepreneurship of the Universidad Panamericana. "It shows a lack of control and corporate governance from the entrepreneur when they forget that the mission, management and value given to investors should come from a legal framework."
The fall of Theranos came from an anonymous tip. A lab employee contacted The Wall Street Journal investigative journalist John Carreyrou who found that the startup cheated on their proficiency tests and provided false information about their results with patients. After several months of investigations by U.S. authorities, Theranos closed its laboratories in 2016 and the courts determined in March of 2018 that Holmes had to return $750 million to investors and shareholders of the company.
Fake it 'till you make it
How does this happen? Holmes (and apparently also the founder of Yogome) fell prey of a phenomenon that is very common among entrepreneurs: the fake it 'till you make it mindset.
This aphorism suggests that by pretending, a person can make certain qualities manifest in their real life. This idea was brought to the modern age in 1920 by Alfred Adler, a disciple of Sigmund Freud, who used it in cognitive behavioral therapy. Adler developed a therapeutic technique that he called "acting as if." Today, this technique is often described as "roleplaying."
In other words, it's about acting as if you really know what you're doing, even if that’s not the case. Alejandro Lomas Torres, CEO of the Startcups business incubator, said, "It is a strategy widely used by entrepreneurs -- and even by many CEOs around the globe -- to present themselves as the best investment option. It's something that Steve Jobs's friends called 'Distortion of Reality.' It's believing so much in your own fantasies that you can not distinguish where the truth is anymore."
Torres also points out that many startups feel an incredible pressure to appear to be a great success story in a very short time. The specialist from the Universidad Panamericana stressed that despite the advances, as a culture, in Latin America it’s hard to understand failure as a step to success and “we like to narrate our triumphs than our moments of trial.” Torres adds, "We want everything to succeed and that's why in many cases entrepreneurs sell more the positive aspects of their careers without understanding that their business model has not matured enough."
"Have you ever seen a house that still has rods on the roof? As if the owners left them there to continue building on top someday? So are some startups that raise capital and participate in thousands of contests, but never really grow their business." This curious metaphor was shared with me by Luis Pablo Pérez Torrescano, director of The Venture Mexico for Chivas Regal, to explain why many entrepreneurs have a great reputation when their businesses are not that large.
For Gustavo Huerta, CEO of BlueBox Ventures, the fault doesn't solely lie with the individual entrepreneurs, but with the entire industry that does not know how to recognize appropriate growth milestones. "Let's make it clear: raising capital is not synonymous with success," he warned in an interview with Entrepreneur en Español. "However, it seems that this is the model with which we reward entrepreneurs in Latin America. Raising capital is part of the business process, but not an absolute indicator of performance. It's just a metric that shows that a startup is doing well and that it needs more money to accelerate its pace."
So, is raising capital bad? Of course not. This form of financing, as mentioned in an article by The Hustle, offers three important benefits for startups: cash (to facilitate business growth), validation (to attract talent, media attention and customers) and guidance (tips from experts, networking and resources).
The problem, as it was in the case of Yogome, is when the capital raised is not used to strengthen the company and to boost the long-term growth of the business. It is, Perez Torrescano told me, "as if the founder of the startup never graduated; as if he or she never really wanted to become an entrepreneur in the first place."
Cases such as those of Yogome shake entrepreneurial ecosystems because they can leave "a stain." This is something that is particularly worrisome for Mexico, a country that, according to the most recent Global Entrepreneurship Index, fell three positions down due to weak cultural support, and a negative perception of business opportunities and entrepreneurial skills of the population.
"Whenever there is an act of corruption in an industry, it affects perception, and we already are not known as a country with high-reliability indexes," said Gustavo Huerta, CEO of BlueBox Ventures. "However, I believe that it will not discourage investors because we know the context of this specific case." To his point, nobody in the U.S. stopped investing in startups because of what Elizabeth Holmes did.
Specialists consulted for this article agreed that a single case does not speak of the entire Latin American ecosystem and, on the contrary, it offers us a great opportunity to learn and to continue maturing. "They should be treated as what they are: isolated cases," said Gerardo Obregón, founder and CEO of Prestadero.com, one of the biggest fintech companies in the region. "To reduce its effects, it is simply up to the entrepreneurs to verify that, despite the success or failure of our companies, we can keep our integrity intact. It seems to me that this is the case of 99 percent of the Mexican entrepreneurs I know."
Without a doubt, as the Latin American entrepreneurial environment continues to grow, these cases will continue to happen. That is why Alejandro Lomas points out that we must emphasize the importance of the entrepreneur as a person and detect cases where numbers are too good to be true as early as possible. "In the end, as in any industry, not everything will be perfect all the time."
Bismarck Lepe, CEO of Wizeline, a provider of business solutions with artificial intelligence based in San Francisco and Mexico City, published a powerful letter on his LinkedIn page regarding the case of Yogome. In that letter, he asked entrepreneurs not to forget that, "investors pay attention first to people and then to the business itself." He also stressed that the startup sector in the region is strong enough to overcome this bad moment.
I agree. Let's all remember that in the same month that the case of Yogome broke the news, the Colombian company Rappi was valued at $1 billion and Corner Shop was acquired in its entirety by Walmart de México y Centroamérica.
Let's learn from this case and move on.