It always surprises me when I hear about various tech startups that eventually resorted to outright scamming. I can understand the pressures of running a startup as things get tough, but I can't ever imagine resorting to making up revenue outright. Yet, whenever an economic downturn hits, these stories start popping up. You may recall back in 2001 when the hot startup Critical Path was caught making up about 10% of its revenue
. A day later, one of the biggest speech recognition companies of the time, Lernout & Hauspie, announced that its Korean division had made up almost all of its revenue
. In that case, it resulted in the end of L&H completely, as well as jail time
for the CEO.
It looks like we may be getting another such story. Just a few weeks ago, CRM provider Entellium was announcing new products
(which they spammed us with a press release about). On October 1st, we received another email pitch from Entellium, urging us to download its software for a free 30-day trial. That same day, the company's CEO and CFO suddenly quit
. A couple days later, most of the company's employees were laid off
and told that the company was out of money.
The whole thing seemed quite odd, especially considering that the company had raised over $50 million, had just launched this product and everything seemed to have been moving forward. Late Wednesday, however, the details came out. It turned out that the two execs who quit, Paul Johnston and Parrish Jones had been flat out lying to its board and its investors concerning revenue
for years. For example, since 2006, the company made less than $3.8 million, but told the board it brought in $15.5 million. That's not just a slight fudging of the numbers -- that's extreme fraud, which was used to help the company raise that $50 million.
The biggest question, though, is where were the board and the investors on this. It's difficult to see how investors would hand over more than $50 million without ever conducting an audit. They simply believed the two execs. It's also worth noting how the fraud unraveled. Apparently, the VP of HR was cleaning out the desk of the former head of sales, and discovered the bogus set of books that the CEO & CFO had been showing the board. She turned them over to the company's comptroller, who gave them to a board member -- which resulted in the board pretty quickly calling the CEO to let him know that they were sending over their own "contract" CFO to "check some things out." That was the point at which the two execs resigned.
You always hope that these stories are simply cases of bad seeds, and that there aren't others doing the same, but it'll be worth watching to see if we start hearing other similar stories. They seem to come in bunches.