News who is the former founder of HeadSpin headed to jail for the scam was further proof that the latest boom in the world of startup and venture capital pairs has resulted in more than just a little fraud. Manish Lachwani, the founder in question, is facing jail time and a huge fine for lying to investors, lies that allowed his company to raise nine-figure funding.
The company stands firm and would probably prefer to let the whole situation fade from the public eye. Fair enough, but Lachwani’s story — The New York Times reports that Lachwani inflated “HeadSpin’s revenue nearly fourfold by making false claims about her clients and creating bogus invoices to cover them up” — is not an isolated incident.
Even after the somewhat old scams 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 plenty of financial upheavals. Why are we seeing so much fraud and related behavior from tech startups?
The rhythm, in a sense. In a historically anomalous period of low interest rates, capital hungry for yield has flooded into the venture capital world. As a result, investors were very busy with their checkbooks and sometimes spent less time on due diligence. Remember that many very young startups have more ideas and potential than hard assets and historical cash flow, so what counts as due diligence for a PE firm looking to buy, say, gas stations is different from due diligence on an early stage startup. But capital has also flowed into late-stage startups, causing many capitals to move too quickly. Mistakes were made or, put another way, some founders saw the boom as a time when they could bend the rules.
One thing to keep in mind is that as a market reaches its peak, you will often see the scam explode. Consider this a top warning. Press play, let’s talk about it!
