Uh Ozy
If you are a digital media startup looking to exponentially grow in the hopes of one day becoming profitable, one thing you will have to do a lot is raise capital. When it is time to raise, you will call up some of the investment banks and venture capital firms looking to deploy capital and paint them a picture of all the viewers with their eyes and ears locked into your content or point to a viewer growth chart. Ideally, the investors all smile and pull out their checkbooks, but they will have some questions about how your vision becomes reality or how they will verify the viewer data they have seen. If your pitch is centered around the incredible activity that your content has had on YouTube, it is safe to say the investors will want to speak with someone who works there. This is normal and should not cause any issues, but if your data is manipulated or does not even come from YouTube, you can either accept defeat without raising the money you need or you can get creative. That is where Ozy Media comes into play.
Ozy Media is a company fitting the description above that was looking to raise $40 million?. They called Goldman Sachs asset management branch and pointed to tremendous subscription and viewer numbers that just about nobody believed. Goldman decided to ask for a call with YouTube to verify the information and received the email address of Alex Piper, a YouTube executive, from Carlos Watson, CEO of Ozy. Piper spoke with Goldman in early February and had only great things to say about Ozy, but there was a problem. “The man’s voice sounded strange to the Goldman Sachs team, as though it might have been digitally altered.” Goldman then reached out to Piper, but not through the email Ozy had given them. Instead, they contacted Piper’s assistant at YouTube, who informed them that Piper was not on the call.
The man on the other side of the phone turned out to be Samir Rao, co-founder and COO of Ozy, trying to convince Goldman to invest with Ozy. Obviously, they did not (Smith 2021).
A couple months later Watson wrote an apology to Goldman. Watson claimed that Rao was going through a mental health crisis that was the cause of the incident. Watson states that he is “proud that we stood by (Rao) while he struggled, and we’re all proud to see him now thriving again” (Smith 2021). Rao apparently took some time off work but quickly returned to his desk at Ozy. Mental health problems are of course a matter to take seriously, but come on. This plan was clearly ran by and approved by Watson, at the very least, who was the CEO of the company. There is no way you can allow that to happen with full knowledge and blame it on your COO’s mental health issues. When the New York Times story quoted above was posted, it prompted a slew of cancelled shows and events on Ozy platforms. Eventually, the company announced that it was closing its doors without stating any reason (NPR 2021). Three days later, Watson announced that Ozy Media was back and better than ever (Mullen 2021). The board said it had hired Paul, Weiss, Rifkind Wharton and Garrison to “conduct a review of the company’s business activities,” but that is no longer happening (Mullen 2021).
Watson called this Ozy’s “Lazarus Moment,” citing the well known biblical reference. When I think of possible “Lazarus Moments” of 2021, it is companies such as Crocs who saw actual financial performance increase that come to mind, not a company that lied to investors, shut itself down, and opened itself back up.
I am sorry, what?
It is crazy enough that this even happened, but Ozy is completely fine? Their capital raise went on its way and succeeded in raising money. Goldman was never really hurt since they did not invest, but Google, YouTube’s parent company, said they reported the incident to the FBI. It is unknown where the FBI stands on the matter as they did not confirm or deny any investigation. In a world where there are more securities lawyers than we can count ready to pounce at the slightest chance of securing a settlement, it is surprising that every one of Ozy’s investors are not lined up at the door with lawyers at their side ready to launch endless lawsuits. This is a textbook example of securities fraud. For one, Ozy was definitely lying about its viewer data, which had long been suspected. Second, I might not be a lawyer but impersonating a YouTube executive in order to raise funds under false pretenses cannot possibly be legal. If Ozy was a public company, this might be the easiest case in SEC history. That is it though, Ozy is a private company and private companies can do things that public ones simply cannot.
When you are a private company, the rules on what you can and cannot say are a lot more gray than for public companies.
If a private company makes an obscene claim like “we have 10 billion daily active users,” the public can laugh at them but it does not matter much. Private stock does not trade often and, when it does, it is only available to accredited investors who have experience and knowledge evaluating investments. If a public company said this, many innocent retail traders would likely buy their stock and lose a bunch of money, which would immediately be followed by the swarm of securities lawyers I mentioned earlier. So one could make the argument that it is the nature of Ozy’s investors which accounts for Ozy’s lack of legal action.
There is another important aspect to being a private company. Let us take a look at the situation from the perspective of an investor who was fooled into giving money to Ozy. Now that you know Rao and Watson tricked you, you probably want your money back. That is where a small issue will come up: Ozy definitely spent it. This is a problem that has occurred quite a few times in the wild land of venture capital. The “fake it till you make it” culture of Silicon Valley leads to ambitious founders presenting their visions to investors as if they are in the present. The investors then happily give the founders their money and it is gone when they ask questions because tech startups have to constantly burn cash to build their company. So when the investors come to ask for their money back, what they end up realizing is that the most likely chance to see their capital again is to let the company run and hope the value of their investment increases because suing would only cause the company to collapse. Also, it will not be easy to raise money in the future if all your investors and board members start shouting about fraud to the media and regulators.
Will anyone impose true regulation on the fundraising processes of venture capital? Probably not. There are simply too many startups, too much fraud, and not enough reason to devote resources for the regulators. The investors in these situations, for the most part, are very wealthy people who likely have extensive knowledge of finance business. Also, the companies are true home run bets. No venture capitalists are running around looking to consistently invest in startups that return 15% on investment. Instead, they are on the hunt for opportunities that are either going to skyrocket in value or fail and go to zero. The investors know that each startup they invest in will probably fail, so they are not too mad when one does. Maybe the FBI will end up prosecuting and Ozy will get in trouble, but not for now. Until then we can all root for Lifeline Legacy Holdings LLC, the one Ozy investor who has filed a suit to retrieve their $2.25MM (Bloomberg News 2021). Good luck and Godspeed.
References
Bloomberg News. n.d. “Bloomberg.” Accessed October 21, 2021. https://www.bloomberg.com/news/articles/2021-10-05/ozy-media-sued-over-co-founder-s-goldman-call-impersonation.
Mullin, Benjamin. 2021. “Ozy Media Says It Plans to Relaunch, in about-Face.” Wall Street Journal (Eastern Ed.), October 4, 2021. https://www.wsj.com/articles/ozy-media-says-it-plans-to-relaunch-in-about-face-11633370757.
Npr.org. 2021. NPR Cookie Consent and Choices. [online] Available at: <https://www.npr.org/2021/10/02/1042691623/ozy-shuts-down> [Accessed 21 October 2021].
Smith, Ben. “Goldman Sachs, Ozy Media and a $40 Million Conference Call Gone Wrong.” The New York Times. The New York Times, September 27, 2021. https://www.nytimes.com/2021/09/26/business/media/ozy-media-goldman-sachs.html.