How quickly a unicorn can fall.
Two years ago, the Gen Z-messaging app IRL was flying high with a $1.2 billion valuation and a fresh $150 million from SoftBank and $20 million from other investors. Not long after, the company spiraled into a web of investigations, lawsuits, and ousted management. In June, IRL shut down—announcing that nearly all of its user base had been comprised of bots.
But it’s hardly over yet. Yesterday, IRL cofounders Abraham Shafi and Genrikh Khachatryan and former president Krutal Desai filed a lawsuit against a handful of defendants, including IRL’s three investors and board members: SoftBank’s Serena Dayal, Floodgate’s Mike Maples, and Goodwater Capital’s Chi-Hua Chien. In the lawsuit, Shafi, Khachatryan, and Desai allege that the investors lied about the prevalence of bots so that they would not “be personally blamed for having run a billion-dollar company into the ground in a matter of weeks.”
A little history of how we got to this point…In Spring of last year, a report in The Information raised questions over whether IRL’s user growth was as impressive as its CEO, Abraham Shafi, had made it sound. Not long after that story was published, the SEC issued a subpoena to the company and later subpoenaed Shafi personally, according to legal filings from a separate lawsuit Shafi filed last month in an attempt to get reimbursement from his legal bills. Shafi ended up providing “two full days of testimony” to the SEC in May 2023, he said in the lawsuit, and Shafi said that he “assisted in preparing and reviewing numerous presentations” to the regulator. (An IRL spokesman said there were "ongoing government investigations." An SEC spokesperson declined to comment.)
By April of this year, Shafi had stepped down as CEO. In August, SoftBank then sued CEO Shafi and five of his relatives for fraud, alleging that they had put on an “elaborate scheme to defraud investors” and had allegedly misled the investment firm and concealed relationships with “proxy services that helped deploy bots onto the platform to masquerade as IRL users.” (A representative for Abe Shafi said that he denies all the allegations in SoftBank’s complaint.)
Now Shafi and his peers are firing back. In the lawsuit filed yesterday, they assert that an independent technology consulting firm analysis, Google authentication data, and research from IRL’s investors during the due diligence process all debunked “bot-related allegations.” The plaintiffs also tried to discredit a report the investors had directed into the bot issue and argued that most of the platform’s users left IRL after alleged outages that took place after Shafi’s departure.
In a statement to Fortune on behalf of IRL and its investors, a spokesman maintained the accuracy of the Board-led investigation and its findings that 95% of IRL’s active users “were in fact automated or from bots.” He said that, shortly after Shafi’s suspension, IRL experienced a “significant drop in daily active users virtually overnight” that was “not due to an outage.”
"Based on this as well as evidence of Shafi’s misappropriation of company funds and repeated interference with the investigation, the Board—after months of review—concluded that the Company’s going forward prospects were unsustainable," the IRL spokesman said in a statement.
What a complete mess.
In other news…Yesterday Fortune tech editor Alexei Oreskovic wrote about a funding round for one of the more unusual health care ideas I’ve read about in a long time: $100 million for science fiction-esque medical pods powered by AI that would conduct heart and blood tests or look at the weird spot on your skin, all in an eight-foot-by-eight-foot cube. Read the story here.
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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