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‘Pattern matching’ is venture capitalists’ favorite tool—and their biggest blindspot

September 27, 2024

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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VENTURE DEALS

- EGYM, a Denver-based fitness technology and corporate wellness company, raised $200 million in funding from L Catterton and Meritech Capital.

- Mendaera, a San Mateo, Calif.-based medical robotics developer, raised $73 million in Series B funding. Threshold Ventures led the round and was joined by Lux Capital, PFM Health Sciences, and Fred Moll.

- Qure.ai, a New York City-based AI healthcare platform, raised $65 million in Series D funding. Lightspeed and 360 ONE Asset led the round and were joined by Merck Global Health Innovation Fund, Kae Capital, and existing investors Novo Holdings, HealthQuad, and TeamFund.

- Cyclic Materials, a Toronto-based recycler of magnet-containing products, raised $53 million in Series B funding. ArcTern Ventures led the round and was joined by BDC Capital’s Climate Tech Fund, Hitachi Ventures, Zero Infinity Partners, existing investors Fifth Wall, BMW i Ventures, Energy Impact Partners, and others.

- Apron, a London-based payments platform for small businesses, raised $30 million in Series B funding. Zinal Growth led the round and was joined by Bessemer Venture Partners, Tony Fadell, and existing investor Index Ventures.

- Prepared, a New York City-based emergency communications AI platform, raised $27 million in Series B funding. Andreessen Horowitz led the round and was joined by NewView Capital and existing investors First Round Capital and M13.

- Bot Auto, a Houston-based autonomous truck developer, raised $20 million in pre-Series A funding from Brightway Future Venture, Cherubic Venture, EnvisionX Venture, and others.

- Observe, a San Mateo, Calif.-based company whose software provides customers a view into the performance of their SaaS products, raised $20 million in a Series B extension from Madrona Ventures and Evolution Equity Partners.

- Convergence, a London-based developer of personal AI agents, raised $12 million in pre-seed funding. Balderton Capital led the round and was joined by Salesforce Ventures and Shopify Ventures.

- Micropep, an Auzeville-Tolosane, France-based micropeptide technology developer for sustainable agriculture, raised $11 million in Series B funding from Corteva, Sparkfood, and existing investors.

- Zenlytic, a New York City-based business intelligence platform, raised $9 million in Series A funding. M13 led the round and was joined by Bain Capital Ventures, Primary Ventures, Company Ventures, angel investors, and others.

- Hotelverse, a Palma, Spain-based hotel room selection platform, raised €5 million ($5.6 million) in Series A funding. GED Conexo Ventures led the round and was joined by Faraday Venture Partners, Eoniq Fund, and existing investors Sabadell VC and Archipélago Next.

- Arya Health, a New York City-based maker of AI software for managing healthcare staff, raised $4 million in seed funding. Twelve Below led the round and was joined by Nebular VC and existing investors Oceans and Ridge Ventures.

- Ensemble, a San Francisco-based machine learning development company, raised $3.3 million in seed funding. Salesforce Ventures led the round and was joined by M13, Motivate, and Amplo.

- Senvo, a Berlin-based spend visibility and reconciliation platform for shippers, raised €2.5 million ($2.8 million) in funding. efy.vc and Two Ravens led the round and were joined by Fund F and angel investors.

- Mako, a San Francisco-based AI investment associate developer, raised $1.6 million in pre-seed funding. Khosla Ventures led the round and was joined by angel investors.

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PRIVATE EQUITY

- Analytical Technologies Group, a portfolio company of Reynolda Equity Partners, acquired NTS Laboratory Equipment, a Fishkill, N.Y.-based maker of laboratory instruments. Financial terms were not disclosed.

- Bishop Street Underwriters, a portfolio company of RedBird Capital Partners, acquired a majority investment in Verve Services, a Pine Lake, Ga.-based auto insurance managing agency. Financial terms were not disclosed.

- New State Capital Partners acquired a majority stake in The Expo Group, an Irving, Texas-based event services provider. Financial terms were not disclosed.

- Visa agreed to acquire Featurespace, a Cambridge, England-based AI payments protection firm.. Financial terms were not disclosed. Featurespace has raised about $108 million in funding from investors included Insight Partners, Mike Lynch’s Invoke Capital, and Worldpay, according to Crunchbase.

EXITS

- Leonard Green & Partners agreed to acquire GeoStabilization International, a Westminster, Colo.-based geohazard mitigation firm, from KKR. Financial terms were not disclosed.

IPOS

- BioAge Labs, a Richmond, Calif.-based small molecule therapies biotech company, raised $198 million in an offering of 10.5 million shares priced at $18 on the Nasdaq. Andreessen Horowitz, Khosla Ventures, Sofinnova Venture Partners, Longitude Venture Partners, RA Capital, Cormorant, Kaiser Permanente, and Horsley Bridge back the company.

FUNDS + FUNDS OF FUNDS

- Asabys Partners, a Barcelona-based venture capital firm, raised €180 million ($201.3 million) for its second fund focused on biopharma, medtech, and digital health companies.

- Era Ventures, a New York City-based venture capital firm, raised $88 million for its first fund focused on the real estate industry.

PEOPLE

- Kainos Capital, a Dallas-based private equity firm, promoted David Gassko and Jeff Moredock to partner.

- Updata Partners, a Washington D.C.-based growth equity firm, promoted Dan Moss to partner.

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Beware of pattern matching