Things seemed to be going well for messaging app IRL when it raised USD170mn of funding in 2021. The business had already received USD200mn in funding from the Vision Fund of Softbank, the Founders Fund, and other sources. 100 employees worked at its base in San Francisco. A glowing article in Forbes featured CEO and co-founder Abraham Shafi explaining how IRL would improve mental health by increasing the connections between people. IRL appeared set to be another unicorn that demonstrated the future of communications lay in OTT apps that obtain a large user base without spending any capital on maintaining a network. There was only one problem. Claims that the app had organically accumulated 20 million active monthly users were a pack of lies.
The company was shut down in 2023 after an investigation by the board of directors concluded that 95% of its users were “automated or from bots”. Now Shafi is facing a potential 20-year prison sentence after he was charged with fraud and obstruction of justice following an investigation by the Federal Bureau of Investigation into assertions made by Shafi to prospective investors.
Shafi is specifically accused of lying to investors about whether IRL was paying incentives to persuade real-life users to download the app. When asked if incentives were being offered to encourage more downloads, Shafi allegedly disguised the true nature of promotional spending and pretended the growth in the user base was organic. A press release from the US Department of Justice explains the indictment.
Shafi told potential investors that IRL was spending only $50,000 a month in paid advertising and that user signups “were not incentivized or paid.” However, Shafi had spent millions of dollars on paid advertising in the form of incentive advertising, a form of advertising in which users are provided a reward in a third-party app if they download IRL. In the lead up to Series C, Shafi asked his vendor for a “big burst” of ads for “a few days” to drive more installs of the IRL app. During the Series C process, investors specifically asked about paid advertising, and Shafi falsely responded that “[u]nlike other apps that spend aggressively to acquire new users, we spend very little.” Shafi concealed IRL’s spending on incentive ads by having them invoiced to a third-party firm, ensuring that the nature and amount of the expense did not appear on IRL’s ledger.
The lies allegedly continued after the funding round was over.
Shafi continued to conceal the amount that IRL was spending in incentive ads after the Series C closed, instructing an IRL employee to create false invoices that listed the ad spending as being related to infrastructure, or “infra costs,” and falsely telling his investors that the money spent on incentive ads had instead been used for other forms of advertising. When the SEC opened an investigation into IRL, Shafi restored his cell phone to a previously saved backup, resulting in the deletion of records, and instructed other IRL employees to lie about his involvement in the scheme.
Comms providers should always be wary of artificial inflation of traffic (AIT) but they can also exhibit a lack of interest in the motives behind it. Not all AIT hurts the bottom line of comms providers; some of it boosts profits. However, even the kinds of AIT that boost profits can also create pressure to devote more capital expenditure to network capacity. If we do not appreciate why people create meaningless traffic then we will fail to detect it.
It is foolish for comms providers to complain that runaway demand means governments must intervene to generate more capital investment in networks if those same comms providers are turning a blind eye to AIT. If demand is being generated by fraudulent activity that it will not be sustained in the long run. Fraudsters may use bots and other gimmicks to boost the valuations of their tech businesses but if there are no genuine customers then any traffic they generate will inevitably decline when their frauds are discovered. The guardians of networks need to be mindful of the systemic risks created by tech bros like Shafi.
