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Greed vs. Due Diligence: Another Case Of Startup Fraud?

from the giving-good-startups-a-bad-name dept

Wed, Nov 25th 2009 7:33am — Mike Masnick

The world of startups can be a fast moving place, with lots of money thrown around quite rapidly at times. In such a world, it's no surprise to hear stories of pure outright fraud mixed in with all of the real stories of actual startups. They seem to come along every year or so -- and usually involve companies raising a ton of VC money and simply making up financial results, which the VCs never seem to check. Last year, it was Entellium who raised $50 million while totally making up revenue numbers. We wondered, at the time, how its investors never got around to actually auditing the company they gave so much money to. However, it really is par for the course for many investors to simply trust the management.

The latest such case, as revealed by TechCrunch, appears to be Canopy Financial, a high flying startup that had raised $65 million, but apparently made up a bunch of its revenue, potentially even forging audit statements from KPMG. Amazingly, the company's CEO is claiming he had no idea this was happening, which is either untrue or an incredibly damning statement on what sort of CEO he is. Once again, though, you have to ask what the investors were doing, and how they handed over such large sums without ever doing any serious due diligence.

These sorts of scams are pretty depressing for all those legitimate startups out there, who work hard to build real businesses, and sometimes even lose out on being able to raise money from these same VCs who were totally snookered by the scammers (though, honestly, would you want those same folks to invest in you really considering their ability to get taken in such a scam?). There's a lot of good things that happen in Silicon Valley... and a lot of money thrown around. Unfortunately, when that happens, it's inevitable that some bad characters jump into the game as well and just cook the books.

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Filed Under: due diligence, fraud
Companies: canopy financial

4 Comments

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Annono Mous, 25 Nov 2009 @ 7:46am

It would have been so so easy for the VC to see the real picture at Entellium if they would have simply looked at the Sales Board that they had to pass on the way into the conference room. It was the biggest white I had ever seen in my life. It showed all the facts for that month. You wouldn't have needed to be an accountant to see that something was wrong.
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Bob Webster (profile), 25 Nov 2009 @ 9:14am

In many cases I'd say at little more diligence is due. Some VC people tend to rely on relationships and overall impressions a little more than tangible proof.
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NullOp, 25 Nov 2009 @ 10:05am

VCs
I one asked one of our senior accountants how fraud/embezzlement occurs so often. He said trust caused most of it. You work with people you build a relationship and then people take advantage. His example was "Bob and John work together. John works for Bob. After a while, Bob simply asks John how some accounts are doing. John replies 'OK, no problems'. Bob takes his word. Next thing, John is in Brazil with a million bucks while Bob explains things to the board." And you tell me there's no need for capital punishment.
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Yakko Warner, 25 Nov 2009 @ 11:37am

General Ackbar was right.
Canopy Financial?

It's a tarp!

"Canopy Financial -- If there's one thing we're good at, it's covering up."

(Yeah, it's about time for vacation to start...)
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