SoftBank Group’s Vision Fund on Monday filed a lawsuit against the founders of IRL, a social media startup it invested in, alleging that they artificially inflated user data, lied to the fund about their performance, and defrauded the fund of millions of dollars.
IRL, a popular social media app for Generation Z that launched in April 2021, appears to be “one of the fastest-growing social media apps for Generation Z,” according to the suit, and SoftBank invested $150 million in IRL in May 2021 based on IRL’s low cost, strong user engagement, and good growth potential. In May 2021, SoftBank invested US$150 million in IRL (currently around RMB1.077 billion), including US$125 million in shares from the company and US$25 million in shares from CEO Abraham Shafi and other insiders. At the time, SoftBank believed IRL had 12 million monthly active users.
But the suit alleges that those numbers were false and that IRL secretly used a large number of bots to create what appeared to be a thriving social network, but was actually designed to “defraud investors”. The scheme began to unravel when the SEC opened an investigation into IRL in late 2022, and in April 2023, Abraham Shafi was suspended as CEO and the company was dissolved in June.
The lawsuit raised questions about the extent to which SoftBank scrutinizes its portfolio companies. When third-party evaluations of user data fell far short of the IRL’s self-promotion, SoftBank representatives accepted Abraham Shafi’s explanation that they were “absolutely inaccurate”. SoftBank has also made some missteps in the past, including taking large stakes in allegedly fraudulent cryptocurrency exchange FTX and devalued real estate company WeWork.
SoftBank’s Vision Fund has underperformed since the market’s high point in 2021, posting a full-year loss for the fiscal year ending March 31, 2023, of $32 billion.
