An Idealistic Startup That Was Just a Sham to Lure Investors: The Rise and Fall of Bitwise
How Bitwise founders landed up in legal trouble
The co-founders and co-CEOs of the unsuccessful startup Bitwise found themselves in a California court, accused of deceiving investors and fabricating financial documents to the tune of $100 million, per The Register.
Irma Olguin, Jr., and Jake Soberal voluntarily turned themselves in following a federal complaint that charged them with wire fraud for providing false information about the assets of their so-called "transformative technology" business. US attorney Phillip Talbert remarked, "Instead of acknowledging the shortcomings in Bitwise's business model, the defendants opted to use a series of false statements, pulling in over $100 million through fraudulent means into a failing venture."
Employee layoffs and bankruptcy
The downfall of Bitwise unfolded rapidly, marked by the sudden furlough and subsequent layoffs of its entire 900-employee workforce on May 30, 2023. The board of directors, responding swiftly, terminated Olguin and Soberal from their co-CEO positions, and by the end of June, Bitwise reached the point of no return and filed for bankruptcy. This dramatic collapse occurred merely four months after Bitwise's optimistic announcement of an $80 million funding round, boasting of a valuation exceeding $500 million and plans to expand into Chicago's South Side.
Bitwise's misleading financial status
Adding to the legal entanglements, the US Securities and Exchange Commission (SEC) levied separate charges, accusing Olguin and Soberal of misleading investors about the firm's financial health. The SEC complaint alleges that in 2022, the duo falsified documents and misled investors, raising approximately $70 million. The financial watchdog noted that Olguin and Soberal have agreed to resolve the SEC's charges, potentially facing fines and other forms of punishment to be determined by the courts.
The Department of Justice revealed that the fraudulent scheme commenced in January 2022. During federal investigations, Olguin and Soberal reportedly admitted to conspiring to deceive their board, investors, and banks about Bitwise's finances to secure venture capital and loans. Court documents outlined a sophisticated strategy, involving the fabrication of financial information in presentations and altering bank statements, board consents, and other financial records to present a misleading picture of Bitwise's financial health. The defendants allegedly misled stakeholders into believing Bitwise was thriving when, in reality, it was on the brink of failure.
Funding rounds & investments
Commencing its journey in Fresno, California, Bitwise garnered attention by securing $20 million in series-A funding in December 2019. The plan was to utilize this investment to expand its footprint to other cities in California's Central Valley, such as Bakersfield and Merced. But the majority of the funds were diverted toward buying out early investors, leaving only a fraction of the series-A funds available for their intended purposes.
The financial reality at Bitwise
During a presentation in February 2022, Olguin and Soberal allegedly informed the board that Bitwise's cash balance exceeded $44 million as of December 31, 2021, with revenue surpassing $58 million for the year. Court documents, however, paint a starkly different reality, indicating that the company's actual cash balance at the close of 2021 was approximately $11.7 million. By June 1, the financial situation had deteriorated further, with Bitwise left with less than $1.5 million.
According to insiders, the majority of the funds were directed towards essential expenses, such as payroll and fringe benefits, which notably included Olguin and Soberal's hefty annual salaries of $600,000 each. They were also allocated towards outfitting the company's office spaces and settling debts owed to prior lenders.
The penalties they face
In the face of these allegations, if convicted, Olguin and Soberal could be looking at a maximum penalty of 20 years in prison and a $250,000 fine.
The downfall of Bitwise represents a significant fall from grace for the idealistic business venture that Irma Olguin, Jr., and Jake Soberal passionately founded in 2013. Their vision was rooted in a noble mission: to generate employment opportunities in the technology sector for under-served communities in economically distressed cities. Bitwise pledged to not only train technology professionals but also offer consultancy services and contribute to the revitalization of commercial properties.