The CEO of one-time unicorn HeadSpin gets arrested for alleged fraud
Too much power in one founder can be a dangerous thing.
Manish Lachwani, the cofounder and former CEO of app testing startup HeadSpin, turned his company into a unicorn over the course of roughly five years and won the backing of investors including Tiger Global, GV, and ICONIQ Capital. But the Department of Justice on Wednesday alleged that the CEO overstated key financial metrics to boost the company’s valuation, inflating HeadSpin’s annual recurring revenue by $51 million to $55 million to investors, per the complaint.
It was when an employee whistleblower raised concerns to members of HeadSpin’s board in 2020 that the house of cards began to crumble, the complaint read: The board formed a committee to audit the business and found that not only did the company boost its revenue figure, it also falsely claimed to have reached profitability, according to the audit as seen by the DoJ. The company had totalled revenues of $26.3 million from its inception through the first quarter of 2020 compared to the $95.3 million it had claimed, while losses totalled about $15.9 million compared to the $3.7 million in net income it claimed in the same period.
Lachwani resigned shortly thereafter, and returned some funds to investors. The process, according to the complaint, slashed HeadSpin’s valuation from $1.1 billion to about $300 million.
On Wednesday, Lachwani was arrested on charges of securities fraud and wire fraud. If convicted of wire fraud, he could face a maximum sentence of 20 years in prison and a $250,000 fine. If convicted of securities fraud, he also faces a maximum sentence of 20 years, though with a fine of $5,000,000. The Securities and Exchange Commission also filed related civil charges, alleging Lachwani defrauded investors out of $80 million.
Throughout the complaint, there was one recurring theme: Though HeadSpin had matured into a unicorn, a company worth over a billion dollars, the document laying out the allegations of fraud repeatedly pointed to the amount of power Lachwani held over key aspects of the organization. Without a full-time financial professional, it was Lachwani who decided when and how sales would be recorded, according to the complaint. And even as employees pointed out red flags, Lachwani charged ahead and would at times provide falsified invoices, the DoJ alleged. When a senior manager sought to standardize the company’s corporate practices, Lachwani resisted the changes, per the complaint.
“Lachwani siloed information, including financial figures, sales and customer information, and routinely restricted employees from speaking with each other or customers about the company’s finances,” the complaint alleged. He was “the final decision maker regarding when, how, and whether the company would record sales and revenue.”
Unfortunately this had a ripple effect as the three unnamed investors the DoJ profiled used Lachwani’s self-reported annual recurring revenue figure as a measure of the company’s success, according to the complaint.
While Lachwani has simply been charged rather than convicted, in this heady moment in venture capital funding, it also serves as a reminder that due diligence is imperfect and that putting too much trust and power in a single founder is not always a good thing.
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