PART 2: The Startup Massacre: The Fraud Factor

Last week, we covered Pattern #1: 

The 2021 Overfunding Curse. Companies like Canoo, Lilium, and Pandion raised huge war chests, spent aggressively, and collapsed when they couldn't grow into their inflated valuations.

But I ended on Builder.ai—a company that didn't just get overfunded. They committed fraud at scale for years. And they're not alone.

Let's talk about Pattern #2.

The Builder.ai Story (And Why It Matters)

Builder.ai raised $445 million from the Qatar Investment Authority and others. 

Their pitch? 

Revolutionary AI that could build custom apps as easily as "ordering a pizza." Just tell the AI what you want, and boom—instant app. No developers needed.

Except there was one tiny problem: The AI didn't exist.

What Builder.ai actually had was hundreds of human developers in India manually coding everything while the company told investors it was all automated AI magic. 

They operated without a CFO for over a year. Internal audits slashed their 2023-2024 projections by 75%. When lenders seized $37M of their $42M in cash, the jig was up.

The founder styled himself as "Chief Wizard" (seriously), which in retrospect should have been a red flag visible from space.

Builder.ai filed for bankruptcy in May 2025.

But here's the thing—Builder.ai's problem wasn't just the overfunding we discussed last week. 

It was that they raised at a $1.3 billion valuation with only $140M in actual revenue AND the tech they claimed to have didn't exist. 

Even if they'd been honest about the manual process, those numbers don't math. But lying about it? That crossed from "bad business" into "fraud."

Pattern #2: The Fake Tech Problem

Builder.ai wasn't alone in the "our AI is actually just humans in a warehouse" strategy.

Remember when "AI-powered" became the magic words to unlock VC checks? Some founders took that a bit too literally.

The problem is that building real AI/ML infrastructure is incredibly expensive and incredibly hard. 

So some companies decided to shortcut the process: Just hire humans to do the work manually while telling everyone it's AI. 

They figured they'd "build the real AI later" once they had more funding.

Spoiler alert: Later never came.

Now, this is distinct from the classic "Wizard of Oz" approach where you manually deliver the service while building the tech—which is actually a legit strategy. The difference? Intent and honesty.

If you're transparent with investors that you're manually delivering while building automation, that's fine. Y Combinator even recommends this approach. 

But if you're actively lying about having tech that doesn't exist? That's fraud.

The Line Between Strategy and Crime

The fake tech problem in 2024 was more subtle than Builder.ai's blatant deception. It looked like:

• Companies claiming "proprietary ML models" that were just GPT-4 API calls with a custom prompt

• "Advanced computer vision" that was actually just Mechanical Turk workers labeling images

• "Autonomous systems" with a human operator on standby 24/7

• "AI-powered analytics" that were Excel spreadsheets with fancy dashboards

The Builder.ai story is particularly wild because they kept the charade going for YEARS. How many board meetings did they sit through lying to people's faces? 

How many investor updates with fabricated metrics? How many demos where they carefully hid the human operators in the background?

Eventually, reality catches up. Always.

Why This Matters for You

Elizabeth Holmes is sitting in federal prison right now because of Theranos's fake blood-testing technology. 

The courts found that she knew the technology didn't work and lied to investors anyway. 

That $9B valuation? Built entirely on vaporware.

Here's what's crazy—some of these companies might have actually survived if they'd just been honest. 

"Hey, we're manually delivering this service while we build the automation" is a totally acceptable startup strategy. But "we have proprietary AI technology" when you don't? That's a felony.

Markets forgive honest failure. They don't forgive lying.

What's Next

So far we've covered two patterns:

1. The Overfunding Curse: Raising too much at too high a valuation before proving your model

2. The Fake Tech Problem: Lying about technology you don't actually have

But the next two patterns are more insidious. They don't involve fraud or obvious mistakes. They look like smart business decisions right up until they kill you.

Next week in Part 3, I'm covering the burn rate trap that destroyed companies with $200M+ from tier-one VCs (including a company backed by one of the richest people on Earth), and the pivot timing mistake that separates survivors from corpses.

The difference between life and death? 18 months of runway and knowing when to change course.

—Brendan Ward