Fyre Failure, Fyre Fraud – Four Lessons For Us All

Fyre Festival

This weekend, I did something I don’t do much of. I watched TV. Specifically, I watched both the Netflix and Hulu documentaries on the Fyre Festival.

OK, I actually watched the Netflix one twice. Once by myself, and once together with my husband. And now I’m writing an article about it. I may have a problem.

Like many I was only peripherally aware of this thing when it blew up last year. I mostly heard about the people making fun of attendees, and the whole thing sounded like it should be called “Rich Kids of Instagram Eat Cheese Sandwiches”

But the whole thing went much, much deeper than incompetent kids trying to run a music festival, or a bunch of rich kids getting scammed.

As I was watching the train-wreck that was the Inaugural (and only) Fyre Festival unfold, what jumped out at me wasn’t just the story of the con, or the lengths to which people were willing to go to pull this thing off (cough, Andy, cough).

Instead, I took away four lessons we can all use in our everyday lives.

Oh, and several hours of entertainment, of course. You can share in the entertainment by watching this commercial before reading the rest of this article.

Be Careful With Your Investments

Billy McFarland was charming, charismatic, and convincing. He had connections. He seemed to be living the life, a successful entrepreneur embodying the dream. And he convinced others – smart people – to invest in that dream.

In the Hulu documentary, Carola Jain is only mentioned briefly, while in the Netflix one they talk about her more. But who is she?

Apparently she oversees brand and marketing for Spartan, Inc, and is the co-lead for Spartan Women. You can check out her LinkedIn profile here. She’s also married to a hedge fund manager, Robert Jain, who runs Millennium Management. And she invested $4 million with Billy, because she believed in Fyre Media.

Remember, the festival was never supposed to be the business. The business was an app (to book celebrities for private events) that a software team was diligently building in New York, while others in the company were off planning this marketing event gone terribly wrong.

She’s not the only one. Comcast came thisclose to investing $25 million. Ezra Birnbaum, a lender with EHL Funding LLC, loaned the company millions.

All in all, the SEC alleged he defrauded at least $27,4 million from more than 100 investors. From the linked article:

“McFarland induced investors to entrust him with tens of millions of dollars by fraudulently inflating key operational, financial metrics and successes of his companies, as well as his own personal success – including by giving investors a doctored brokerage account statement purporting to show personal stock holdings of over $2.5 million when, in reality, the account held shares worth under $1,500. “

So, basically, he lied to investors about how profitable the company was and how much wealth he held.

But how did Comcast dodge the bullet while so many others were sukered in?

Three words: financial due diligence.

If you’re considering making private investments in startups, you need to know key financial information. How much money do they make? How do they make that money? What kind of insurance do they have? Where is the proof of their finances, their insurance, etc.?

As an example, here were the red flags Comcast saw:

  • The company didn’t provide key financially documents, typically required as part of a large company investing with you
  • The app (which is what Comcast was investing in – the business) “didn’t have a sufficient billing mechanism” and “wasn’t technically sophisticated enough”, according to reports. In the industry, we call this “vaporware” – where the vision of what will be way outstrips the reality of what the technology is

If you’re ever considering investing in a technology startup, in addition to making sure it’s money you can afford to lose, you should conduct a level of due dilligence on the finances and technology of the company before you plunk down your hard-earned cash.

Beware Influencer Marketing – On Both Sides

Very, very briefly in the Netflix documentary they mentioned that one of the (many) lawsuits were around the influencers, like Kendall Jenner, who helped hype this thing up.

What didn’t they do? They didn’t disclose their financial relationship with Fyre media using #ad, or other advertising disclosures like you’re supposed to. The FTC Guide to Endorsements clearly outlines disclosures for paid promotion.

And I’d say getting paid $250k for a single Instagram post certainly counts.

The rule is very, very simple – if you’re compensated in any way (free product, free trip, money, rainbow colored zebras, whatever), you need to prominently and clearly disclose that fact.

As a consumer, you need to be aware that many people don’t follow this simple guideline. And if you are an influencer – even a small one – you need to (1) be aware of the law and (2) be aware that these things can be a poor reflection back on you. So be careful what you lend your name to.

Pyramid Schemes Work – Until They Don’t

Ah, the good old pyramid scheme. Or Ponzi scheme, so named after Charles Ponzi, who paid investors using the money of other investors.

After watching both the Hulu and Netflix documentaries, and doing some additional digging online, it appears that all these businesses were essentially pyramid schemes.

The trouble seems to have started with Magnises, the amazing “Black Card For Millennials”, and its promises of tickets. It’s the Hulu documentary that goes into this in more detail, citing buying tickets on Stub Hub at the last minute to pay for tickets to events like Hamilton, and then selling tickets to the Super Bowl to pay for the Hamilton tickets.

The pyramid looks to have just gotten bigger and bigger through the Fyre festival. Take the whole “Fyre Wristband” idea, which was a cashless payment system guests were strongly encouraged to load.

The timing of that cashless payment system certainly looks like it was put in place specifically to raise money to pay off Ezra Birnbaum. He had made the loan I talked about with an equivalent interest rate of up to 120% if certain penalties were invoked.

Seems like a payday loan might have been better.

OK, not really. But that’s a pretty nasty loan.

Pyramid schemes work, until you can’t get the next round of money to pay off your prior investors. And then they fall apart spectacularly.

Big Hat, No Cattle – Or All That Glitters Is Not Gold

A Masarati. A luxury penthouse in New York City. Private planes. Supermodels. Private islands.

It appeared that Billy was living the good life, flush with wealth, rich as heck. But he wasn’t. In fact, his net worth is currently valued at negative $5 million.

The wealth was actually him burning through investors cash. Part of why people trusted Billy, why they invested with him, and why they bought into him and his company was because of the external image he created of a wealthy tech entrepreneur.

People often look to the external trappings of wealth and make judgements. This person must be rich because they drive a fancy car. That person must be broke because they drive a slightly beat up looking ten year old Honda Accord (cough, me, cough).

You can’t judge a persons net worth by their home, their clothes, or their transportation. Net worth is what you have in the bank, not what you spend. You can fuel a glamorous looking life relying totally on debt, with a lower net worth than your average college student.

And at the same time, you can have a ton of money in the bank and prioritize saving over spending.

What Did You Take Away?

If you haven’t watched it yet, which one should you watch? Personally, I found the Netflix version more entertaining. But the Hulu version gave a lot more details on Billy and the fraud he perpetuated. Generally I would say to watch them both, especially if you’re interested in financial fraud in the era of Instagram.

Did you watch either documentary? If so, what lessons did you take away? Let me know in the comments.

6 thoughts on “Fyre Failure, Fyre Fraud – Four Lessons For Us All”

  1. DadsDollarsDebts

    I have not seen the documentaries but remember being drawn to the story last year. Psyched you wrote a post about it. This guys was a hustler but not in a good way . Oh well. Sometimes I am glad to not be important enough for someone like him to try and swindle.

  2. jumpstartfromscratch

    Missed Fyre Fest in the news cycle, but somehow watched the Netflix doc Saturday, and was hooked immediately. I’ll check out the Hulu version.
    It reminded me of a game of chicken. They had 6000 people coming to a “private island” with no music, food, housing, toilets, or plan. Instead of coming to their senses and cancelling the planes, they just continued driving forward, and let all those people come anyway.
    The worst thing is once you are on an island, there aren’t many ways to leave.

  3. I watched this after seeing several people in my Twitter feed (including CMO) posting feedback about it. It’s a pretty powerful video – glad I watched it!

    This should almost be required viewing for potential project managers. I’ve managed several major engineering projects in my career, and one thing that sticks out about the experience is that – when done well – it can look very easy and simple to people. It is very easy to underestimate the amount of due diligence, attention to detail, and planning that is required for a successful project. In this case, the team just basically ignored that nuts-and-bolts work and just seemed to let wishful thinking take over. I constantly remind the engineers that work for me – hope is not a plan, and that hope without a plan is just a wish. They ignored that advice here – with predictable results.

    What really amazes me is how many team members stuck with the project, even when it was obviously a lost cause. It seemed to me like, at least in some cases, people were staying because of financial incentives. If that’s correct, another financial lesson here is to underscore the value of FU money. I mean, if I was part of that project team implementing the festival, and I saw the kind of stuff that was going on – having that pile of FU money makes it easy for me to walk away from that kind of unhealthy situation. Life is too short to deal with that nonsense. (I mean – the scene about getting the water through Customs comes to mind. Just…wow.)

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