What everyone missed about Builder.ai

Builder.ai, a company seemingly riding the massive AI wave, has been exposed for alleged financial fraud and a deceptive use of "AI" in its app development. While claiming to use artificial intelligence to build apps easily, it appears a significant portion of the code was actually written by human developers in India. This situation highlights critical issues within the venture-backed startup world, particularly around inflated valuations and the relentless pressure for growth.

Here's a breakdown of what went wrong and what it means for the industry:

• The Core Deception: Financial Fraud and Fake AI

  • Builder.ai was allegedly involved in "round-tripping," a form of financial fraud where two companies, Builder.ai and Versed, routinely billed each other for roughly the same amounts between 2021 and 2024. These payments were often for products and services that weren't actually provided, effectively inflating both companies' revenue figures to present to investors.
  • This round-tripping allowed Builder.ai to overstate its projected 2024 sales to creditors by 300%, ultimately leading lenders to seize the company's funds, as they rightfully should. The presenter feels strongly that this kind of dishonesty is unacceptable and will always be exposed eventually.
  • Beyond the financial fraud, the company also allegedly faked its core AI proposition. Despite marketing itself as an AI-powered app builder, much of the development work was reportedly handled by human developers in India, using a basic "scaffold" from AI before handing it off to people. It's noted as a somewhat amusing, but ultimately pathetic, twist on the "AI" narrative, though the financial fraud is considered far more egregious.

• Understanding Startup Valuations and Growth

  • Startup valuations, especially for venture-backed companies, are primarily based on growth in revenue, not necessarily current profit. Investors are looking for month-over-month and year-over-year revenue increases, betting on the future potential for growth to continue or improve.
  • This focus on revenue growth, rather than profitability, can create an environment where companies prioritize looking successful over actually being successful, leading to practices like the alleged round-tripping by Builder.ai.
  • The presenter personally prioritizes profit and sustainable business practices in their own ventures, noting that while their T3Chat business has seen significant profit growth, investors typically only care about revenue.

• The Risks of Early-Stage Investment and Accredited Investors

  • Investing in early-stage companies is extremely risky; there's a 99% chance the investment goes to zero. This is why investors in such companies must be "accredited investors," meaning they meet specific financial qualifications.
  • To be an accredited investor in the U.S., one must either have made $250,000 annually for the last two years (and expect to continue) or have over $1 million in assets excluding their primary residence. The exclusion of a primary residence is critical because it prevents individuals from gambling their housing security on speculative investments.
  • Once money is invested in a startup through traditional mechanisms, it's effectively gone until a liquidity event (like an IPO or acquisition), which can take 5 to 15 years. This highlights the need for investors to be financially liquid enough to absorb the loss.

• Different Investment Strategies and SoftBank's Role

  • Investment firms employ different strategies. Y Combinator uses a "shotgun approach," investing smaller amounts in hundreds of early-stage companies annually, hoping a few become massive successes. Even a small percentage of a multi-billion dollar company from an early investment yields huge returns.
  • SoftBank, on the other hand, uses a "money bags approach." They invest much larger sums (billions) in later-stage companies that already show some promise, aiming for a 2x-10x return rather than the astronomical multiples of early-stage hits. Their investments are meant to be safer, albeit with lower individual percentage returns.
  • The presenter finds it particularly baffling and "fucking funnier" that Builder.ai's alleged fraud occurred in a later-stage company, typically considered a "safer bet" by investors like SoftBank and Microsoft Ventures, rather than a volatile early-stage startup where such failures might be less surprising.

• The Importance of Honesty in Business

  • There is a strong belief that honesty ultimately wins in the long term, even if it feels like a disadvantage in the short term. The presenter highlights how transparency about outages and issues (like with T3Chat) can make a company seem less stable than competitors who simply lie or hide problems.
  • The presenter maintains strict separation between their personal content business (T3 Content) and their startup business (T3 Tools) to avoid any appearance of fraud or conflict of interest. This means T3 Content (YouTube channel, advisory) is entirely separate from T3 Tools (T3Chat, UploadThing, etc.), and they don't engage in practices like trading free product usage for sponsorships, which could be seen as crossing streams and resembling the fraud discussed.
  • The prevalence of fraud, such as creators being paid for undisclosed reviews or companies "cosplaying a successful business" by focusing solely on optics (big offices, huge marketing spend) without real revenue, is frustrating and disheartening.

In essence, the Builder.ai saga is a stark reminder that the pressure for growth in the venture capital world can lead to egregious fraud, and that despite the hype, transparency and genuine business practices are paramount for long-term survival. Always be honest, especially when money and public trust are involved.