Hi, this is Wayne again with a topic “Founder fraud is a symptom of an overheated market l TechCrunch Minute”.
Are founders getting more fraudulent, or are we just seeing the end of some really good times now? The news this week is that Manish lawani, founder of headpin, pleaded guilty to three counts of defrauding investors: the total damage 18 months in prison, three years supervised release and a $ 1 million fine. So what did he do? That was so bad. He lied about how headspin was doing covered his tracks and then used fake Revenue to raise a lot of money. Crunch Bas notes that his company actually put together about6 million in biter Capital to date, and that’s usually the mark of a startup. That really has something going on not of a Founder who’s, cooking the books back in 2020, the company’s board figured out what was going on, forced him out and then cut its valuation.
Lawani, though, is hardly the only person to pull a fast one in startup land. Lately and the list of fronds is long S. Bankman free got a hit with prison time for his work at crypto exchange FTX and its sister trading firm Alam. That trial took ages involved huge sums and wound up with SF getting 25 years in prison Trevor Milton EV truck company Nicola four years, $ 1 million fine for fraud and that company went public, so regular folks lost money.
Then there was oneclick checkout company bolt that got into a dispute between its Founders and its backers, and then earlier this month the US government said that coding, school Bloom Tech, previously Lander school as Tech runch put. It quote: deceived students about the cost of loans, made false claims about graduates, hiring rates and engaged in illegal Lending. So why does it feel like we are in the midst of a fraud wave well Dan prac over at axios notes that the headspin news is kind of a quote: indirect indictment of diligence light venture capital. I love that, in short, VCS often make investments without doing the same sort of super deep digs that other types of investors might execute, and partly this is because startups are often more idea and potential than big business and hard assets, and that means that due diligence Just might not look the same at all all stages of corporate life. That said, I would not be shocked if the smart money out there in the Venture world was amping up its diligence requirements, even if that does make Founders a little bit annoyed. It’S a lot of money, don’t complain more recently.
Vure Capital grew quite a lot during the covid period, more money came in and then more money was invested, lots of money moving very quickly, and it seems that some folks at the time thought that it would be. Okay, to cut a couple of corners and rewrite or embellish their own Financial history to help them score some of that available Capital. The times writes the low interest rate environment had a part to play here, which is absolutely true: 0 % interest rates or zerp LED to lots of capital out there looking for yield, something that really did help the Venture World raise a lot of money. Another way to think about this situation is that boom times tend to generate more fraud, and, as I was told, fraud is often a sign of the top.
What does that mean? Well, that Rising fraud is a good signal that the market has become overheated, even if we only get to find out about the fraud later on, which is too often the case expect to hear more stories like this in the coming quarters. I really doubt that we’re out of the fraud Forest yet more tomorrow, .