JPMorgan Chase’s $175 million acquisition of Frank, a startup that was said to help students navigate the financial aid system, has turned into a legal battle between the bank and Frank’s founder, Charlie Javice. According to JPMorgan, Frank and Javice were not what they seemed, and the bank is accusing Javice of fraud. Ron Lieber, author of the Your Money column for The New York Times, talked to Lizzie O’Leary of The Daily Beast about the story.
Initially, Frank’s business was to help students fill out the FAFSA form, a federal financial aid form with over 100 questions. Frank wanted to make it less complicated for students and parents, and while FAFSA was free, Frank would assist in filling it out for a fee. Frank was not solely focused on FAFSA, however. The startup tried to help people with various financial aid-related issues.
Javice’s background was the driving force behind Frank’s sales pitch. She told investors that she understood the financial aid system’s flaws and knew how to fix them because she had personally experienced them. Javice’s pitch resonated with investors, and Frank received low-double-digit millions of dollars from angel investors and venture capital firms.
The company claimed to have over 4 million customers, making it an attractive acquisition target for JPMorgan. The bank had been slow to respond to the digital financial service market but had realized that it needed to pay more attention to digital financial services to capture young customers.
JPMorgan believed that it was acquiring a list of over 4 million young people who were attracted to a brand that helped them get money for college. The bank was also acquiring a young executive who could help them reach that audience. However, JPMorgan’s lawsuit alleges that Frank had nowhere near 4 million customers, and most of them were fabricated. According to the bank, the real number of customers was closer to 300,000. JPMorgan said that these were the real emails and real names they found in the database. Javice allegedly made up the rest or purchased them from a third party.
Javice’s explanation for the difference in the number of customers was that Frank had acquired millions of customer leads but hadn’t converted them into actual customers. However, JPMorgan claims that Frank didn’t have the resources to follow up on the leads, and many of the leads were fraudulent. JPMorgan is also claiming that Frank misled the bank about its revenue and expenses. The bank claims that Frank lost $32 million in 2020, rather than the $10 million profit that Javice had told them.
JPMorgan’s lawsuit has implications for startups that rely on acquiring customer leads but can’t convert them. The lawsuit is likely to change the way investors assess the value of startups, particularly for companies with a large number of leads but little conversion. The lawsuit could also prompt startups to provide more transparency about their data collection and the sources of their customer leads.
The Frank-JPMorgan case highlights the importance of due diligence before an acquisition. Startups’ claims of their customer base and revenue should be verified before the acquisition. Due diligence also helps investors identify the risk of fraudulent practices, which is a growing problem in the startup world. Startups can be desperate for funding, and some founders might resort to unethical practices to attract investors. Due diligence is critical in identifying such practices before the acquisition is complete.