JP Morgan Acquisition of Frank: Why the Startup Industry is Vulnerable to Fraud

In 2021, JP Morgan acquired Frank, a college financial planning company, for $175 million. Charlie Javice founded Frank in 2017 to help students apply for and negotiate financial aid, enroll in online courses, and find scholarships. JP Morgan hired Javice and a few other Frank executives with the acquisition.

Initially, Frank was seen as a way for JP Morgan to reach younger customers. But the deal quickly turned sour, and JP Morgan sued Javice and another former Frank executive, Olivier Amar. JP Morgan alleged Javice and Amar inflated the company’s user database with nearly 4 million fabricated customers created by an unnamed data scientist who generated false personal information–including birthdays and schools.

The Frank scandal drew comparisons to the Theranos controversy, although on a much smaller scale. In 2015, Theranos, a blood-testing startup, was found to have provided false information to investors in the medical industry regarding the accuracy and reliability of its technology to secure funding.

These examples highlight how fraudulent practices can pervade the startup industry. Given their innovative and disruptive nature, start-up companies have a high probability of failure, with almost 80% failing to reach projected rates of return or profitability and 40% failing altogether. To compete with more established businesses and attract investment, start-ups may have more significant incentives to deceive investors or fabricate facts about their core business.

Founders often face substantial challenges securing funding and forming partnerships with suppliers and customers. Unlike conventional firms, startups develop innovative technologies and strategies and often have negative cash flows, making it difficult to determine their value using traditional methods. 

Obtaining funding and business partnerships requires time, effort, and resources, especially for early-stage startups. And their competitors often have more experience and sophistication in the industry. To compensate and convince investors of their legitimacy, founders may effectuate a fake it till you make it strategy.

A rush to launch products and attract media attention and the pressure to compete against other startups may also contribute to fraudulent practices. To survive, start-ups must demonstrate rapid growth and stand out among a crowded field of competitors. Media coverage often operates as a positive feedback loop, building upon initial stories of success or significant investment by venture capital firms. 

Start-up founders develop skills to persuade the public and investors that their business model will succeed. Despite the necessity for creative pitching, start-up executives should refrain from resorting to bad faith exaggeration or bending the truth.

Returning to the Frank controversy, Javice is accused of falsifying Frank’s consumer database and exaggerating the company’s achievements. In a 2018 interview with Forbes, Javice claimed that Frank had helped 300,000 students to get $7 billion in financial aid. However, after the JP Morgan acquisition, Javice posted on LinkedIn that the number had risen significantly to 5 million students, almost twenty times the original figure in just three years.

Javice also exaggerated her achievements to attract attention from investors and the media. She claims she struggled to secure financial aid while studying at Wharton, but the school did  not confirm this. Additionally, she falsely claimed to have turned down a Thiel Fellowship while studying at Wharton.

Fraud in the startup industry is a complex and multifaceted issue. Start-up companies face significant challenges in securing funding and competing with more established businesses. This incentivizes founders to do whatever is necessary to generate buzz around their company, including, in some cases, gross exaggeration. Frank is another reminder of the importance of due diligence in the investment and business partnership process. It is essential for investors, partners, and customers to carefully scrutinize the information provided by start-up companies and carefully vet their founders and executives.