How Softbank ́s due diligence was defeated by a bot army

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Welcome to The Menu Magic - Finance & AI newsletter

In today’s email:

• Startups vs Incumbents, the AI battle

• How Softbank´s due diligence was defeated by a bot army

• Meme of the week

Startups vs Incumbents, the AI battle

Hey there, my dear friend! 🌟

I hope you're doing well. I recently stumbled upon an article that I think you'll find intriguing, especially if you're into the fintech space. It's from Lightspeed Venture Partners and dives deep into the ongoing battle between startups and incumbents in the realm of AI's application layer. Let me break it down for you in our usual chit-chat style.

The AI Summer of 2023 🌞

It's the summer of 2023, and every day there's a new AI product demo that's taking the internet by storm. Whether it's on Twitter X or TikTok, these demos are showcasing the magic of AI, with technologies like GPT-4 and Stable Diffusion leading the charge. But here's the catch: while it's an exhilarating time for AI enthusiasts and developers, it's also a cutthroat competition, especially for those aiming to create real-world products for end-users.

The Stakes are High 🎲

The potential of AI is reshaping our tools and platforms in ways we haven't seen since the dawn of the internet, cloud computing, or the mobile revolution. But with the ease of building and launching AI products, thanks to accessible coding education and powerful tools like GitHub’s Copilot, the market is flooded with startups trying to make their mark.

AI is Everywhere 🌐

Almost every startup is integrating AI into their products. But it's not just them; even the big players are jumping on the bandwagon. This widespread adoption has made AI a commodity. Remember when mobile apps were the new cool thing? Now, they're a given. Similarly, AI is transitioning from being a unique selling point to a standard feature.

The Power of Distribution 🚀

Startups are quick to innovate and capture market opportunities. But as time progresses, the big players, with their vast resources, start to catch up. And their biggest advantage? Distribution. They already have a massive user base, marketing departments, and established promotional channels. So, if a startup's AI product can be replicated by a big player, they're in for a tough fight.

Strategies for Startups 🛡️

So, how can startups stand their ground against these giants? Here are three tactics:

1. Unique Formats: Think Snapchat's "snap" format or their "stories." If a startup can introduce a proprietary format that gains traction, it can be a game-changer. With AI, there's potential for entirely new formats, like generative video avatars, which can redefine user experiences.

2. Value Destruction: Undercutting prices or offering something that incumbents can't match without hurting their existing business can be a winning strategy. Robinhood did it with commission-free trades, and Airbnb disrupted the hotel industry.

3. Hidden Data Moats: In the AI world, having access to unique and high-quality data can be a massive advantage. The more exclusive data an AI product can learn from, the better it becomes. Palantir and TikTok are classic examples of companies that built strong data moats.

The Final Word 📜

While AI offers transformative potential, at the end of the day, AI startups are just... startups. The key to success isn't just leveraging the latest tech but solving real problems for real people. And if they can do that quickly and efficiently, they might just emerge victorious in this fierce battle.

I hope you found this breakdown insightful! If you're working on an AI-first product or just want to chat more about this, hit me up. Until next time, keep innovating! 🚀

Warm regards,

P.S. If you want to dive deeper, here's the [original article]. It's a great read!

How Softbank's due diligence was defeated by a bot army

In the bustling world of tech startups, IRL, a four-year-old social app, emerged as a promising alternative to giants like Facebook and Discord. Catering to the youth, it allowed them to chat about shared interests and plan real-world events. The CEO and co-founder, Abraham Shafi, proudly announced that the app had amassed a whopping 20 million monthly active users, a figure that had nearly doubled from the previous year. This impressive growth led SoftBank to value the company at a staggering $1 billion in a $170 million funding round.

However, as the saying goes, "All that glitters is not gold." Inside the company, whispers of doubt began to surface. Some employees questioned the validity of the user numbers that were being publicly touted. The root of the skepticism? Shafi's definition of "active users" seemed more expansive than what was conventionally accepted in the industry. This raised eyebrows, with some feeling that the company might be inflating its numbers to appear more successful than it truly was. To add fuel to the fire, third-party measurement firms like Sensor Tower estimated IRL's monthly active users to be between 1 million and 2 million, a far cry from the 20 million claimed.

Oh, and speaking of plot twists, there's this insane lawsuit going on. Softbank, the investor, is suing IRL. Here's the tea: Softbank had poured $150m into IRL back in 2021, with $25m of that going straight to some insiders. They were under the impression that IRL had a solid 12 million monthly users. But get this, IRL was apparently shelling out 50k a month on a bot army, making the app look buzzing when in reality, it was more like a "virtual ghost town." Yikes!

Recommendations for VCs to Up Their Due Diligence Game:

1. Third-Party Verification: Always cross-check user numbers and other metrics with third-party analytics platforms. These platforms can provide an unbiased view of the app's performance.

2. Deep Dive into Definitions: Ensure that the definitions used by startups, such as "active users," align with industry standards. If a company uses unconventional definitions, it's crucial to understand the rationale behind it.

3. Employee Feedback: Sometimes, the most honest feedback comes from within the company. Engaging in anonymous discussions with employees can provide invaluable insights into the company's operations and claims.

4. Technical Analysis: Invest in technical tools and expertise to analyze app activity and detect any anomalies or patterns that suggest manipulation.

5. Past Performance Scrutiny: Look into the company's past claims and how they have evolved over time. Consistent discrepancies between claims and actual performance can be a red flag.

In the rapidly evolving tech landscape, due diligence is more critical than ever. By adopting a meticulous and multi-faceted approach, VCs can ensure they're making informed decisions and backing genuinely promising startups.

Meme of the week

I'd love to hear your feedback on today's newsletter! Is there a specific type of content you'd like to see more of in the future? Since I'll be releasing a new edition each week, I welcome any suggestions or requests you may have. Looking forward to hearing your thoughts!

The Menu Magic is written by Francisco Cordoba Otalora, a Fintech entrepreneur living in London.

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