Curious how all of a sudden we can swing from parties and conferences to loom and gloom. Over the last few days, several pieces of bad news have hit the world of startups, Silicon Valley, and venture capital.
“When the going gets tough, the tough get going”[1]
During the last few days, two VC heavyweights have contacted their portfolio companies CEOs, instructing them to get ready for a severe cash crunch and economic downturn. This means cutting costs wherever possible, concentrating on what you can do instead of what you think you can do, and plan to make your cash last for at least a year. This already means a death sentence for some companies who simply don’t have a year left in the bank, no matter how much they cut costs. Mike Arrington has posted interesting posts on both Benchmark Capital and Sequoia Capital’s “batten down the hatches” emails. A copy of the R.I.P. presentation has found its way to docstoc – a must read, with some excellent background on the source of the crisis.
“There’s a ninety-five pound Chinese man with a hundred sixty million dollars behind this door” [2]
While browsing through TechCrunch, I came across this shocking piece on Entellium, a CRM startup that managed to raise $50M in venture capital, apparently with the help of cooked books. By the look of things, the culprits weren’t exactly Ferran Adria, but more like a three-year-old left alone with a recipe book, ingredients and some matches.
The CEO and CFO were arrested by the FBI at their homes, and charged with wire fraud (PDF). Between 2006 and 2008, they reported much higher revenues to the board, in order to increase interest by potential investors into the company. This all ended when Melisah Wojtacha, a human resources VP, came across the fake books while clearing out the desk of a departed employee.

Investors include Seattle-based Ignition Partners, who invested some $19.7M into Entellium. There is more information on Seattle Times’ website. Why a company that had actual revenues needed to do this is unclear, unless it has to do with the reported Maserati Quattroporte the CEO drove, along with over-$1M-houses in Mercer Island and Seattle.
“Fellas, last year I made 3 million dollars, but your 50 thousand was the most fun. Are you ready? Then let’s go get ‘em.”[3]
It would appear that in this particular case, there was little or no oversight from the board on the company’s books, other than relying on what was being reported by the CEO and CFO. The real numbers lay in the bank statements, and it is critical for effective oversight to match the books against them. Otherwise, it’s easy to see that having a couple million dollars in a bank account can prove tempting to some. In these last few years, series A investments have mainly consisted of low seven-digits amounts, usually even less than $1M, which could provide investors with less motivation to watch the financials in depth than if they had sunk $100M into the company. Running audits is expensive and time-consuming, so some may have settled for less. In cases like Entellium, it shows that it doesn’t pay off in the long run.
Movie quotes:
- Soundtrack, The Jewel Of The Nile.
- Danny Ocean in Ocean’s 11.
- Janet Colgate in Dirty Rotten Scoundrels