Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
SoftBank’s Vision Fund has been accused of deliberately “destroying” a Gen Z-focused social media company it once valued at more than $1bn to safeguard its reputation as an investor amid a probe by regulators.
In a lawsuit filed on Wednesday, the co-founders of IRL, which attracted $150mn from SoftBank after being touted as an alternative to Facebook for younger users, claim the company and two other venture capital investors concocted a “flagrant, outrageous lie” that the app was almost entirely populated by bots as a pretext for closing the struggling start-up in June.
“If the company never had a real user base . . . they could position themselves [as] the victims of a sophisticated fraud, rather than the venture capitalists who drove a billion-dollar company off a cliff in just a few short weeks,” lawyers for Abraham Shafi, Krutal Desai and Genrikh “Henry” Khachatryan wrote in their complaint.
They sued SoftBank, alongside co-investors Goodwater Capital and Floodgate Fund, as well as the directors installed by the venture capital firms to IRL’s board, for breach of fiduciary duty, among other claims.
The allegations against the Japanese conglomerate come after a series of high-profile failures, bookended by the recent bankruptcy of SoftBank-backed WeWork.
SoftBank itself sued IRL’s former chief executive Shafi and members of his family in July, in a lawsuit that is likely to be contested, claiming the founder had defrauded the Japanese group by lying about IRL’s user base and alleging that he and his co-conspirators deleted evidence of the scheme once regulators started probing the start-up.
It claimed it invested in the app on the back of assurances that it had 12mn monthly active users, when in fact a report commissioned in 2023 found 95 per cent of users to be fake.
Shafi and the other defendants “employed bots to make IRL appear as though it was a growing, thriving app”, SoftBank’s lawyers wrote. “In reality, the platform was a virtual ghost town, filled with bots deceptively mimicking active human users.”
They added that Shafi had “concealed the scheme from [SoftBank] during the due diligence process through a mixture of misleading statements” and “omissions of material facts”.
But in his lawsuit, Shafi claims SoftBank had done its own due diligence and had initially been extremely keen on the app. SoftBank chief executive Masayoshi Son himself “wanted to meet within 48 hours” of hearing about the opportunity “and offered a $500 million investment”.
After a market downturn in 2022 soured some of its bets and SoftBank lost its $100mn investment in FTX, there was a “strong reputational incentive for SoftBank’s employees to avoid any further embarrassment”, Shafi’s lawyers allege, and the existence of an investigation by the US Securities and Exchange Commission into IRL led the venture capitalists to look for a “scapegoat”.
VC-installed directors at IRL then commissioned a report and “used the ‘95 per cent bots’ lie as an excuse to shut down the company and return capital to shareholders — meaning, return capital largely to SoftBank, Goodwater, and Floodgate, who stood to recover the lion’s share of the company’s $40 million cash on hand because they owned preferred stock”.
Lawyers on the case brought by Shafi and his co-founders include Stephen Shackelford of Susman Godfrey, who was on the team that won a $787.5mn settlement from Fox over its airing of false voter fraud claims about Dominion Voting Systems.
SoftBank, Goodwater and Floodgate did not immediately respond to requests for comment.