Joonko inflated numbers with fictional customers

Joonko credit: Cadya Levy
Joonko credit: Cadya Levy

The Israeli startup has been caught faking data as investors led by Insight Partners scurry to retrieve their money.

For several months now investors in the Israeli startup Joonko have suspected that things have not been managed properly at the company. They claim that they repeatedly asked the CEO and founder Ilit Raz to set up a mechanism to monitor financial activity, but she dragged her feet on the matter.

Last week the suspicions became concrete after a number of investors in the company discovered that Raz had made false presentations by artificially inflating the number of Joonko's customers. Some of the methods included presenting a candidate in the free pilot phase as a paying customer, as well as falsifying documents. The CEO forged receipts, signed documents and confirmations of money transfers of potential customers as if they were paying customers, even though they were not. The forgeries were not discovered in the most recent due diligence conducted by Insight Partners in early 2022.

Insight Partners , which led the most recent financing round in Joonko, is now trying to salvage some of its money. The huge venture capital fund wants to retrieve a large part of the $12 million that it invested in Joonko last year, which reflected a company valuation of $77 million. The company's board of directors believes that despite the fraudulent activity, the company's coffers are still full and it will be possible to claw back some of the investment. Other investors including Vertex Ventures, Alabama Futures and Target Global are in talks in order to receive back funds from the company.

"Unethical behavior and fraudulent acts"

Last week, the venture capital funds that have invested in the company and some members of the management decided to open an investigation following reports about the CEO's falsifications. After the findings of the investigation were presented to Raz, she admitted them and immediately resigned from the company. As a result, at the beginning of the week, most of the company's 40 employees were summoned for pre-layoff hearings at Joonko's offices on Yigal Alon Street in Tel Aviv.

Now the investigating group is examining whether there were others in the company who knew or suspected the existence of the fraud. The investors have identified managers that they trust in order to conduct this check reliably. The investigation is being led on behalf of the investors and the management by COO Ilan Band, who was appointed just over a month ago, when the suspicions surfaced. Another partner in the investigation is Aviv Cohen, the company's chief of staff.

Insight has reacted harshly to the findings of the investigation, and Liad Agmon, who joined the company's board of directors in September 2022, was among those who initiated activity against the management and the company's conduct. As mentioned, the board claims that they tried to convince Raz to set up a control mechanism to oversee the company's financial activity, but she put off the matter.

The board said, "The company was recently made aware of misstatements in the financial reporting of the company. Specifically, the board and other executive officers of the company lost confidence in the CEO's ability to deliver on repeated requests to develop and support an internal finance function as part of the maturation of the company and its business. As a result, the board and other executive officers of the company carried out an extensive review of the CEO's performance.

"The CEO was found to have engaged in egregious, unethical and fraudulent conduct, which caused harm to the company and its shareholders. The CEO was confronted with the findings of the investigation, and she voluntarily resigned in response. The extent of the situation remains under investigation and next steps are under consideration."

Insight Partners said, "We do not tolerate findings about improper conduct, fraud or illegal activities in the investment fund or any of its portfolio companies."

When confronted by investors Raz promised to return hundreds of thousands of dollars she received for her shares in a secondary investment and there are no financial claims against Raz personally.

Insight Partners has invested hundreds of millions of dollars in Israeli companies and its portfolio includes about 100 companies such as Wiz, SentineLone, Papya Global, MoonActive, and Lightricks.

A huge gap between image and reality

The crisis at Joonko is not only about inflating numbers but also organizational culture which according to employees' reports and former employees was expressed by a tense atmosphere at the company, creating "roles" of employees who were closer or less close to management and a frequent turnover of employees. This is consistent with the board's statement that "extreme" behavior was also found.

The findings create a gap that cannot be bridged between the image that Joonko cultivated for itself over the past few years and the reality inside the company. Joonko, named after the first woman to reach the summit of Mount Everest, was founded to promote social goals and allow tech companies to integrate minorities and disadvantaged populations.

The company markets a platform that allows HR managers to share resumes of candidates from disadvantaged backgrounds that reached advanced stages in job interviews but were not accepted, to promote quality candidates among women, minorities, trans people, people with disabilities, senior citizens and US military veterans, who should be considered before examining candidates from stronger populations.

"In the existing atmosphere of promoting occupational diversity among vulnerable populations of different genders and backgrounds, there would not be an investor who would not want to be close to this company," a source close to the company told Globes. "Raz was a female CEO - and there aren't many of them in high-tech - and she raised a lot of money in a short time on a topic that was easy to sell."

Raz sat on a panel in last year's "Globes" business conference several weeks after Joonko completed its latest financing round led by Insight. "We are hiring employees from sectors not represented in high-tech," she said. "This entire round I raised from US companies and it was much more difficult from the previous round, which was closed the previous year."

Raz was a highly respected CEO, hosted in podcasts and frequently interviewed by the media. Just two weeks ago she told "Walla" that the company was responsible for much recruitment and claimed, "Joining us creates an opportunity to grow together with the company and contribute to a positive change in the world." Raz also benefited from a secondary round of several hundred thousand dollars, which as mentioned she promised to return after talking to investors. "The investment thesis in the company was correct," insists one of the investors.

"There is a critical mass of huge companies in the US that are willing to invest in the issue of social diversity and are willing to spend tens of thousands of dollars or more per year in order to provide a security credentials to demonstrate that they are doing so. At the same time, the technological value that this company brought with it was not clear: what is the company's intellectual property: is it a resume sharing system or a database of resumes for candidates from disadvantaged backgrounds?"

"This isn't the last case that will come to light"

Joonko itself has undergone several incarnations. It was founded in 2016 by Raz and two other partners who have since left the company: Elad Shmilovich and Guy Grinwald, raising funds from investors such as Aubrey Blanche and Israeli Baat Enosh.

Joonko was accepted into the prestigious Techstars startup accelerator Textars and in 2017 excelled in the Salesforce accelerator. The company changed the product it was developing only in 2019, when it raised a $2.4 million in seed funding at a company valuation of $4 million from Alabama Futures, and then began to gain momentum.

Joonko peaked in 2021, which was a year of plenty in hiring, but seemed to slump with the onset of the global tech crisis that led to layoffs and a halt in hiring - especially among big companies. Hiring became a low priority at many companies and many companies laid off employees from minorities and other disadvantaged sectors first. In the US, for example, companies such as Twitter, Google and Meta fired many immigrants who thus lost their US work visas as well as their jobs.

An investor close to the company said, "This is probably not the last such case that will come to light. In the market, other cases with certain similarities to Joonko have been discovered, and in some places they preferred to handle the issue discreetly and beneath the radar. In other places, similar processes may be expected. The decrease in the scale of capital investments in tech companies is like a fall in the water level in a pool that has exposed entrepreneurs who have no cover."

Many entrepreneurs shroud themselves in secrecy

Ilit Raz is not the only one in the tech industry that embellishes numbers for the investors or for other parties. The phenomenon of misrepresentations is a common problem in the tech industry. Traditionally, privately-held tech companies like startups keep their revenue, loss and customer data under wraps, for fear of competition. These are companies that are at an initial and sensitive stage in their lives, whose bigger rivals may use their data against them. At a more mature stage, they choose to go public and thus reveal the numbers to the public for the first time.

However, many entrepreneurs make use of this shroud of secrecy in order to act in a way that is contrary to the interests of investors or the company. The tech investment bubble in 2020-2021 attracted many investors to Israeli tech, with many of them performing easier due diligence, and in practice giving entrepreneurs discounts in order to invest in them.

Senior venture capital investor Bill Gurley coined the term "remote due diligence" for the ease with which investors were putting their money into some tech startups.

In the case of Joonko, Insight Partners was enthusiastic about the numbers presented to it at the end of last year and decided to lead a $25 million investment in the company. In retrospect, some of the data presented were inflated and justified a financing round that should not have been completed, according to those close to Joonko. Other investors who joined the round relied on Insight - and lost their money, unless they will be able to put their hands into the company's coffers.

The financial reporting rules for startups play into the creative hands of the entrepreneurs. The most common misrepresentation is related to annual income. In the industry it is referred to as "dough," which means it can be kneaded by the developer and the result that comes out of the oven is unpredictable.

Many entrepreneurs and investors forego revenue or profits as a measure of the success of an early stage company and focus on the "annual recurring revenue" (ARR) - the expected calculation each month of what the revenue will look like at the end of the year, based on the current revenue rate.

But many entrepreneurs tend to embellish the reality presenting trial clients as paid contracts. They present one-time service agreements as two year deals that automatically renew, and monthly contracts are presented as if they were two years. Another form of enhancing reality is the presentation of agreements conditional on the scope of use, while presenting only the strongest months.

If this is not enough, the annual revenue rate - the most popular reporting figure by tech entrepreneurs is not according to accepted financial standards and is not regulated by the accounting rules. In the accounting audits, revenue is the main parameter, but it does not allow entrepreneurs or investors to present the momentum that exists for the company, which helped them until recently to raise a lot of capital.

Ilit Raz did not respond to this report.

Published by Globes, Israel business news - - on June 27, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Joonko credit: Cadya Levy
Joonko credit: Cadya Levy
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