Happy Friday, it’s Fortune finance editor Jeff Roberts pinch-hitting for Allie. I published a feature this week about the strange case of ‘Diamondhands’—the pseudonym for a startup founder named Nader Al-Naji, who was arrested this summer over an alleged crypto scam called Bitclout. Ordinarily, the tale of a crypto bro ripping off his backers would be about as rare as a day ending in y, but the case has some unusual elements—including the role of VC giant Andreessen Horowitz, which turns up as the fraud victim “Investor 1” in the Justice Department’s case against Al-Naji.
In my experience with Andreessen, the firm is very mindful of its public image and so it’s a surprise to see them join a criminal lawsuit against a founder. This is especially the case given that it only invested $3 million in the project and as, in the words of one source, it’s bad for business for firms to “rat on entrepreneurs.” Andreessen has been tight-lipped about the matter but the best guess is that it’s participating only reluctantly as a result of one of those subpoenas that are reportedly flying around Silicon Valley stemming from at least two investigations.
The bigger mystery in the whole Diamondhands affair, though, is how he persuaded the Valley’s most sophisticated investors—his other backers included the likes of Sequoia and Coinbase—into funding something like Bitclout in the first place. Bitclout, you may recall, saw Al-Naji in the guise of Diamondhands launch a social network populated by 15,000 crypto personalities he scraped from Twitter. Users were then invited to trade Bitcoin for magic bean tokens in order to bid up the price of individuals on the network (yes, the premise was for people to trade like commodities based on their popularity and behavior). What’s more, Al-Naji claimed the whole network was decentralized and only ran on “code and coins.”
This last part was nonsense, of course, and prosecutors are now alleging that Al-Naji ran the entire operation, while also helping himself to $13 million that he blew on living large in Beverly Hills and lavish cash gifts to family members. (Al-Naji, who is back on social media plugging a new crypto project, has described the charges as a “mistake”.) The craziest part, though, was this was the second time that Al-Naji allegedly pulled something like this. He was the one who, back in 2018, raised over $100 million for an algorithmic stablecoin called Basis that looked to all the world like a pyramid scheme. In that case, he gave most of the money back after deciding not to launch Basis after all—minus a little over $10 million that he claimed to have spent “all on lawyers,” which sounds totally improbable.
How could so many top VCs have been so blind to projects that, in hindsight, look to many like blatant scams? Based on my conversations with four different venture firms taken in by Al-Naji, the answer appears to be VC’s fondness for “pattern matching”—the practice of looking for founders who have the same biography and attributes of other entrepreneurs who went on to make it big.
Two different VCs, in fact, used the same term to describe Al-Naji: “out of central casting.” Meanwhile, all of them described being impressed by his Ivy League pedigree (he was on the crew team at Princeton), as well his confidence and penchant for talking about ambitious, outsize ideas. All of these qualities are the calling card of many successful founders. Unfortunately, they are also the qualities of a successful con artist. That’s the problem with pattern matching—it can be so appealing that it can cause even the smartest investor to forget about common sense. You can read the full feature here. Allie will be back on Monday.
Jeff John Roberts
jeff.roberts@fortune.com
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