News that the former founder of HeadSpin is headed to prison for fraud was further evidence that the last boom in the paired worlds of startup and venture capital led to more than just a little bit of fraud. Manish Lachwani, founder in question, is getting prison time and a massive fine for lying to investors, lies that allowed his company to raise nine-figures’ worth of funding.
The company persists, and would likely prefer to let the entire situation fade from the public eye. Fair enough, but the tale of Lachwani — The New York Times reports that Lachwani inflated “HeadSpin’s revenue nearly fourfold, making false claims about its customers and creating fake invoices to cover it up” — is not an isolated case.
Even past the somewhat dated frauds at Theranos and Rothenberg Ventures, there’s been a lot to cover lately. From investor complaints about Bolt’s fundraising, to BloomTech, Nikola, Binance and FTX, we’ve seen a lot of financial shenanigans. Why are we seeing so much fraud and related behavior from upstart tech companies?
Pace, in a sense. In a historically abnormal period of low interest rates, capital hungry for yield flooded into the venture capital world. As a result, investors got very busy with their checkbooks and sometimes spent less time on diligence. Recall that many very young startups are more ideas and potential than hard assets and historical cash flows, so what counts as diligence for a PE firm looking to buy, say, gas stations, is different than doing diligence on a seed-stage startup. But capital poured into late-stage startups too, leading to a lot of capital moving very quickly. Mistakes were made, or, put another way, some founders saw the boom time as a period in which they could bend the rules.
One thing to keep in mind is that as a market reaches its peak, you will often see fraud explode. Consider it a top warning. Hit play, let’s talk about it!