News that HeadSpin's former founder will be sent to prison on fraud charges is further evidence that the last boom in the twin worlds of startups and venture capital has spawned more than a little fraud. The founder in question, Manish Lakhwani, is facing a prison sentence and a hefty fine for lying to investors, a lie that enabled his company to raise nine figures worth of funding.
The company is adamant and probably wants this whole situation to disappear from the public eye. That's understandable, but the Ratchwani story — The New York Times says that Rashwani “nearly quadrupled Headspin's revenue by making false claims about customers and creating fake invoices to cover them up.” '' is not a special incident.
Even past the somewhat old fraud cases at Theranos and Rothenberg Ventures, there's a lot to cover these days. From investor complaints about Bolt's funding to Bloomtech, Nikola, Binance, and FTX, we've seen plenty of financial fraud. Why are we seeing so much fraud and related behavior by emerging technology companies?
In a sense, the pace. In an era of historically abnormally low interest rates, capital seeking yield flooded the venture capital world. As a result, investors were often so busy juggling their checkbooks that they had less time to be diligent. Remember that for many very young startups, ideas and potential are bigger than physical assets or past cash flow. So the diligence for a PE firm looking to acquire a gas station, for example, is different than the diligence for a seed-stage startup. But capital also poured into late-stage startups, leading to a lot of capital moving very quickly. A mistake was made, or to put it another way, some of the founders thought the boom period was a good time to bend the rules.
One thing to keep in mind is that when markets reach their peak, fraud often explodes. Consider this your best warning. Press play and let's talk about it!