Microsoft (MSFT) made a big mistake that blew up in its face last month.
It wasn’t enormous in a financial sense, only costing the tech giant around $30 million. That’s peanuts compared with Microsoft’s $245.12 billion revenue last fiscal year.
But the embarrassment factor is fairly intense.
You see, two years ago, Microsoft invested in a U.K.-based company originally known as Engineer.ai. Founded in 2016 by Sachin Dev Duggal and Saurabh Dhoot, it employed a chatbot named Natasha to build custom apps for businesses.
At least, that’s what it said it did.
The startup’s troubles first began publicly showing in 2019 with a Wall Street Journal article that accused it of fraud. After reviewing documents and interviewing current and former staff members, investigators were concerned that:
Engineer.ai doesn’t use AI to assemble code for apps as it claims. [The sources] indicated that the company relies on human engineers in India and elsewhere to do most of that work, and that its AI claims are inflated even in light of the fake-it-till-you-make-it mentality common among tech startups.
So, Engineer.ai changed its name to Builder.ai, which went on to earn $100 million in series C funding in March 2022. It secured another $250 million from names like Qatar Investment Authority and Microsoft in May 2023.
Yet, that July, the company’s chief financial officer suddenly resigned. By year’s end, it had lowered its revenue forecasts significantly. And by March 2024, it came out that Duggal and Dhoot were under investigation in India for money laundering and fraud.
Builder.ai announced insolvency last month, but that’s not even the worst part. It appears The Wall Street Journal was right all along, and “Natasha” never existed.
Instead, 700 engineers in India were busy plugging in answers to clients’ requests.
The Hype Is Rarely Worth It
It’s impossible to go through life without making mistakes.
We only have so much information to work with at any given time. And the future is never completely predictable.
That’s why there isn’t a single investor out there with a perfect track record.
We all remember Warren Buffett’s airline losses in 2020, helping Berkshire Hathaway (BRK-A)(BRK-B) lose $50 billion in a single quarter. Bill Ackman, the billionaire I met earlier this month, almost lost his entire business years ago because of a bad investment.
And even Sir John Templeton, who Money magazine dubbed “arguably the greatest global stock picker” in 1999, still invested in a few failures in his day. So I’m not here to hype any hope of investment perfection.
It’s really not possible.
I’m also not here to mock Microsoft. Heaven knows I’ve made my fair share of foolish mistakes.
Fortunately though, I’ve also learned my lessons from those errors. So I know there are plenty of ways to reduce that tendency.
For a multitrillion-dollar company like Microsoft building out AI infrastructure, the investment in Builder.ai probably made sense… at the time. And for a company that large, the total loss won’t mean much in the grand scheme.
But that’s not always the case for individual investors.
We humans are always going to be drawn to shiny, new things. But that desire for “new” needs to be paired with common sense, not FOMO.
FOMO, short for the fear of missing out, might be a term coined by millennials. But, like our attraction to the new, it has been a driving force throughout history.
It was true of tulip bulbs in the 1630s… of the South Sea Bubble in 1720… and dot-coms in the 1990s…
The big difference is that it almost never leads anywhere good. Much, much more often, it results in rash decisions, ultimate regrets, and embarrassment.
The only real cure for FOMO is to follow rule No. 2: Do your research.
Do Your Research and Know Your Management
To be clear, I’m not saying that all AI investments are unworthy of your investment. AI infrastructure has been a major theme of ours in the pages of The Wide Moat Letter (paid-up readers can catch up here).
But with any new technology, there will be businesses that thrive on hype… and not much else.
I could be wrong here, but I don’t see how Builder.ai’s corporate investors could have possibly done their full due diligence. If they had, they would have known the startup once went by the name of Engineer.ai…
Which had been credibly accused of fraud.
I understand that most mom-and-pop investors aren’t likely to even think about that kind of cover-up. (And it usually isn’t a worry at all with more established companies.) But a big player like Microsoft should have understood that risk and taken the proper precautions against it when considering getting involved in a brand-new business.
There are actually many ways to investigate name changes, including doing a simple Internet search – such as, “Did Builder.ai ever operate under a different name?” – or by using the Wayback Machine at web.archive.org.
But even if those searches come up squeaky clean, there’s plenty more research to be done. Potential investors should also:
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Review the company’s financial statements, including its sources of income, cash flow, and overall balance sheet. And not just its most recent statements; you want to delve as far into its history as possible.
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Consider its price-to-earnings ratio, funds from operations, earnings per share, dividend yield, and/or other relevant measurements. All of these should give you a good idea of what the company is capable of and how pricey it’s trading.
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Read up on the business from a wide spread of sources, along with the sector it operates in. What has it accomplished? Where does it stand now compared with its peers? And what is it capable of still?
Then, investigate its management. That’s rule No. 3, and it’s a big one. Because even if all your other research reveals you’re looking at a stellar product or service operating within a wide-open consumer market…
Inexperienced, lackluster, or dishonest management can still turn all that profit potential into one giant loss. Executives are the ones calling the shots, so be as sure as possible they’ll call them in your favor.
Read about them on and off their websites. Learn their business backgrounds, their corporate goals, and their personal driving forces. Look at their pictures and what expressions or body language they use. Listen to or watch them in interviews.
The more “interactive” you can be with them, the better.
You can still find yourself mistaken after doing all that work, it’s true. But you’ve reduced those chances drastically, increasing your ability to make more money…
And keep your dignity as you do.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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