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No Oversight: Inside Boom-Time Start-up Fraud and What It Revealed

No Oversight: Inside Boom-Time Start-up Fraud and What It Revealed

after Manish Lachhwani Founding Silicon Valley software start-up Headspin in 2015, he nearly quadrupled the company's revenue figures and falsely claimed that companies including Apple and American Express were customers. Where there was loss, he showed profit. He used Headspin's cash to make risky trades on tech stocks. And he made fake invoices to hide it.

What was particularly breathtaking was how easily Mr Lachwani, now 48, did all this.

While Headspin had raised $117 million from top tech investors – including GV, the venture capital arm of Google parent company Alphabet; And Iconic Capital, which helps manage Mark Zuckerberg's billions — it had no chief financial officer, no human resources department and was never audited.

Mr Lachwani used the lack of observation to paint a better picture of the evolution of headspin. Even though its main investors knew the start-up's financial condition was not perfect, according to Mr. Lachwani's lawyers, they chose to invest anyway, ultimately propelled Headspin to a valuation of $1.1 billion in 2020. When investors pressed Mr. Lachwani to add a chief financial officer and share more details about the company's finances, he simply ignored them.

These details came out this month sawdust In the US District Court for the Northern District of California after Mr. Lachwani pleaded guilty three cases of fraud In April. He will be sentenced next month, with each count carrying a maximum sentence of 20 years in prison.

The absence of control over headspin is part of an increasingly noticeable pattern among Silicon Valley start-ups that have run into trouble. Over the past decade, investors in tech start-ups were so eager to back popular companies that many often overlooked reckless behavior and gave up key controls like board seats in the service of faster growth and disruption. Then when founders took the “fake it until you make it” ethos too far, their investors were often unaware or helpless.

FTX, the cryptocurrency exchange that collapsed last year, had a three-person board that had barely any influence over the company, tracked its finances on QuickBooks and used a small, little-known accounting firm. The failed blood-testing company Theranos had no financial audit for six years. The founders of those companies have been convicted of fraud.

Now, amid the startup turmoil, more fraud is beginning to surface. Frank, founder of internet connectivity start-up, college support company, has been charged cloud edge A lawsuit has been filed, and the social media app irl Used to be Investigated And filed a lawsuit against, Last month, Silicon Valley investor Mike Rothenberg met Criminal On 21 cases of fraud and money laundering. On Monday, Trevor Milton, the founder of electric vehicle company Nikola, was sentenced to four years in prison for lying about Nikola's technical capabilities.

“Governance got a little lax during the bubble,” said Healy Jones, vice president of financial strategy at Cruise Consulting, which provides financial services for startups. Recently, Mr. Jones said, he has noticed venture firms doing more due diligence on potential investments, but “they probably shouldn't be getting a gold star for completing their job description.”

Through a lawyer, Mr. Lachwani declined to comment.

Rajeev Butani, who took over as Headspin chief executive in 2020, said in a statement that the company's board took immediate action after learning of Mr. Lachwani's conduct that year and cooperated with the government investigation.

“We are grateful to our customers who have supported us throughout our journey,” Mr Butani said.

Mr. Lachwani started Headspin in Palo Alto, California, in 2015 after selling his previous company, Appurify, to Google. Businesses use Headspin's technology to test and monitor their apps across different geographic regions and devices. The start-up quickly attracted money from investors including SV Angel, Felicis and GV.

Soon there were red flags. Investors said in legal filings that Headspin's financial statements were often months late, if at all. The company's financial department consisted of an outside accountant who worked mostly from home using QuickBooks, a basic system designed for small businesses. Headspin had no human resources department or organizational chart and was not audited.

Around 2015, Mr Lachwani saw an opportunity to make a profit on Headspin's cash reserves. “It's very sad to see that money is getting really low interest,” he wrote in an email that year to Karim Faris, a GV investor who sat on Headspin's board.

Mr. Faris advised Mr. Lachwani to keep the cash in “very conservative and liquid instruments.” But over the next few years, Mr. Lachwani used Headspin's cash to buy stock and options in tech companies including Snap, Roku and Tesla, according to bank statements filed as part of the case. At one point, he sent Mr. Farris a bank statement showing that the money was in cash and cash equivalents as declared by Mr. Farris.

A GV spokesperson declined to comment.

By 2017, Mr. Lachwani was inflating Headspin's revenue to investors by including income from client contracts that were not finalized and which were canceled, he said in his plea agreement.

Headspin's investors tried to make an impact and failed. Mr. Faris and Headspin Chairman Nikesh Arora each provided a list of candidates to appoint chief financial officer, they said in the announcement. According to claims made in a submission filed in court, Iconic pushed Mr Lachwani to add more control.

The presentation said Mr Lachwani resisted Iconic's demands, resulting in a “rift between them”, leading to the founders wanting to return Iconic's investment. Mr. Lachhwani never appointed a chief financial officer.

Iconic and Mr. Arora did not respond to requests for comment.

Headspin's accountant, Sana Okmenskaya, said in an announcement that Mr. Lachwani had instructed her to add income from the new contracts to the company's books. When she asked to see the contract he ignored her.

“He seemed very busy and often worked late into the night,” she said in the announcement.

His lawyers said in a filing that Mr. Lachhwani sometimes sent Ms. Okmenskaya invoices that he altered to include money that was never invoiced. Ms Okmenskaya, who did not respond to a request for comment, said in her declaration that he had also lied to her about details of the contracts to explain the discrepancies.

In 2019, Mr. Lachwani cashed out $2.5 million of his own shares in Headspin and sold them to an investor.

Investors poured more money into Headspin in 2020, valuing it at $1.1 billion. By then, Stefanos Loukakos, a technology executive, had joined the company as senior vice president and discovered Mr. Lachwani's pattern of misrepresentations.

That March, Mr. Loukakos shared his concerns with Mr. Arora in a 16-slide presentationWhich was later filed in the court. For example, Mr. Lachwani claimed that Headspin had more than 20,000 devices on its network, but Mr. Loukakos found that the actual number was closer to 2,000. When Mr. Loukakos asked an engineer on Slack about the discrepancy, the engineer replied, “Ask Manish.”

Mr Loukakos' presentation also included text messages that appeared to show Mr Lachwani abusing employees and abruptly firing them, including one employee who was in the middle of a video call with a customer.

Headspin's board launched an investigation. Mr Lachwani stepped down in May 2020 and agreed to return $1.9 million of the $2.5 million he had cashed in. The company restructured its finances and returned the money to investors who wanted to withdraw the money.

Headspin continues to operate. In March, it announced An undisclosed amount of new funding from Atlassian Ventures. An outside accountant valued the company at $302 million, more than 70 percent below its 2020 valuation.

Before sentencing next month, Mr Lachwani's lawyers made a case for a lesser sentence. Despite Mr Lachwani's misrepresentations, none of Headspin's investors actually lost money, he said.

“Mr. Lachwani did not need to say false or misleading things to build a successful company,” his lawyers wrote, “but he did.”




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