Managing Your Cash Flow
How BASIC financial due diligence could have prevented the FYRE Festival failure
10 min read
11 February 2019
Forget marketing. Basic due diligence can save investors, employees and creditors time, money and self-respect. These are the lessons from the FYRE Festival failure.
Nothing captures the millennial zeitgeist in all its hedonistic glory as a music festival. Whether #Glasto or Coachella, the music festival scene has exploded over the past few years, having successfully bottled the carefree vibe of the 60s a la Woodstock in a more palatable and Snap-able form.
The winners are the investors and corporate brands that back these events, the musicians who get a chance to engage with their audiences in real time, the millions of people who attend these once-in-a-lifetime gigs, as well as the independent retailers (read: SMEs) who have a chance to peddle their on-brand wares.
But it all went wrong at the FYRE Festival, as seen in Netflix’s scathing documentary FYRE: The Greatest Party That Never Happened that chronicles its implosion for posterity.
FYRE Festival: Expectations v Reality
FYRE was billed to be the ultimate luxury music festival experience. You may remember the ads featuring today’s ‘It’ girls of the Jenner and Hadid persuasion as well as 400 Instagram influencers, models and other millennial movers and shakers.
Its infamous founder, Billy McFarland touted FYRE to be “The biggest event of the decade, I promise you.” Yet the event never even happened.
People were promised cocktails on the beach, resort-style villas and meals prepared by VIP chefs, but for the thousands who paid between £900 to £75,000 a head to attend FYRE, they arrived on the Bahamian island of Great Exuma to see sand-swept mattresses, sagging tents, soggy cheese sandwiches in styrofoam boxes…and nothing more.
— Trevor DeHaas (@trev4president) April 28, 2017
It was a failure of epic proportions and festival founder, Billy McFarland is now in prison.
The failure not only affected the festival goers but also the investors, creditors, local workers and economy. One FYRE festival worker was forced to use $40k of her savings to cater for 1,000 meals per day. Since the documentary, a ‘GoFundMe’ page has been set up raising over $200k. Another festival worker went on record to speak about McFarland’s toxic and homophobic demands when he was asked to trade sexual favours for drinking water.
McFarland talked a big game and failed to deliver, begging the question: what actually went wrong? Was he out to scam thousands of moneyed millennials or was he just a buffoon in businessman’s clothing who underestimated the demands of putting on festival of this size and scope?
FYRE Festival fraud: Who is Billy McFarland?
McFarland’s entrepreneurial journey reads like that of many whizz kid serial entrepreneurs. The 28-year-old started his first business, an outsourcing company that connected brands with designers, at age 13. He dropped out of university to pursue entrepreneurship, like many American greats.
And like many American greats, he went on to found an online ad company, Spling, and another exclusive credit card company called Magnises that offered members with luxury perks. He knew his market early on: young people with a lot of disposable income and a hunger for living the high life.
McFarland’s most ambitious enterprise is Fyre Media Inc., the parent company of the Fyre Festival. He positioned Fyre Media as a massively successful business worth $90 million, but investigations reveal that the company actually turned over about $60,000 in its heyday. McFarland built his brand around a persona he had carefully cultivated over the years; that of a hyper-wealthy jet-setter living in a $21,000-a-month penthouse apartment in New York and driving a $110,000 Maserati.
Billy McFarland was arrested on 30 June 2017 and, in March last year, pleaded guilty to fraud. In July 2018, he admitted two more counts of fraud for setting up another ticket-selling scam while on bail.
He admitted to scamming investors of more than $26 million by giving them false documents that made Fyre Media look successful. McFarland admitted that he knew he had “betrayed the trust of my investors, my customers, my family”.
Since then, he has been found guilty and jailed for six years. The judge described him as “a serial fraudster” who had been dishonest for “most of his life”.
Why did investors buy McFarland’s story?
Buzzacott’s Corporate Finance expert, Alex Judd believes that the disaster could have been avoided with basic financial due diligence.
“Being the accountants that we are, we couldn’t help but identify areas where our diligence work would have raised red flags, stopping the venture in its tracks before it spiraled out of control,” he says.
Judd’s team works with investors, banks and businesses undergoing growth who require due diligence to be performed for investments, lending, and acquisitions. He explains, “Due diligence is about taking a step back to see the bigger picture and providing assurance that the decisions being made are the right ones.”
10 red flags that would have killed the FYRE Festival scam at the outset
- Unsubstantiated revenue – false representations were made to investors regarding the company’s turnover, with income claimed to be in the millions when it was actually under $100k.
- Bank overdrafts – using overdrafts as longer-term funding, which should be used as part of the working capital cycle.
- High cash burn – a company spending money faster than it receives money raises the issue of ‘when will it run out?’
- Large cash payments – any company dealing with cash raises the risk of fraud. It could also link to money laundering, undisclosed payments and understatement of profits.
- Accounting controls – the control environment in the finance team would have been exceptionally weak, with Billy McFarlan being the only person having true transparency and control.
- Personal AMEX payments – the management team and other employees were forced to make personal AMEX payments, again highlighting the control weaknesses and lack of cash.
- Lack of adequate insurance policies – a high-level review of the company’s insurance policies would have identified there was no cancellation insurance. This would give a clear indication of management’s appetite for risk.
- Local staff unpaid – reviewing creditors gives a clear indication of a company’s ability to pay them. Not paying staff gives an immediate indication of how frail a business is.
- Spiraling marketing spend – this occurred mainly before the festivals downfall, however high marketing spend to acquire customers can indicate whether a business is viable in the long term.
- Last minute property and lease changes – from the Investment Memorandum the company lied about its property holdings. A review of the property leases and commitments would have identified the dire financial position the festival and company was in.
“Had the company been subjected to a due diligence process, the above would have been identified,” Judd adds. “Under normal circumstances any one of these red flags, if not satisfactorily cleared, could result in an abort scenario.”
The Netflix documentary reveals the actual impact of fraud on the wider ecosystem. It also illustrates the ugly side of entrepreneurship and what happens when you buy into one person’s vision with no facts holding up the house of cards. McFarland may have been a fraudster, but this story echoes thousands of others, when business owners get swept up in the glamour of being your own boss and living a social media life.
Do you actually have a business that will stand the test of time? Sadly, one of the most basic business questions has now become an existential one.