We have this vision in our minds about corporate boards: experienced, no-nonsense folks with bottom-line good sense all wrapped together in a “does not suffer fools well” package. Three recent case studies tell us that we are misguided in our assumptions. Here’s the first example in a series.
HeadSpin — Yet another Silicon Valley fraud start-up. Who were the investors? To name two: GV — Google’s (Alphabet’s) venture capital subsidiary and Iconiq Capital (manager for the Zuckerberg fortune but terrible at spelling).
These gazillionaires, with off-the-charts IQs, plunked their money into a company without getting board representation. They also let HeadSpin sally forth without a single audit. In fact, HeadSpin had one accountant — a freelance accountant who worked from home and used only QuickBooks.
HeadSpin had no CFO or HR department. When anyone asked for, oh, say, financials, Manish Lachwani, simply ignored them.
HeadSpin claimed Apple and American Express were clients that used its software for app testing. No one ever checked with those companies to verify that they were indeed customers. They were not and there were many others on the list of customers who were not customers.
Well, it was a fraud. So much of a fraud that Lachwani has entered a guilty plea to three counts of fraud. Most of the other fraudsters have at least gone to trial. One of his not-so-clever tricks was to take investors’ money and invest it in Snap, Roku, and Tesla. He never shared his portfolio approach to running a business with his investors. He made up financial statements and joined a long line of Silicon Valley fraudsters: Elizabeth Holmes (Theranos); Samual Bankman-Fried (FTX), Trevor Milton (Nikola), and 9/10ths of the dot.coms.
The lack of oversight is stunning — no financials, no CFO, no bank statements – just a few of the things boards should be looking at. But governance is something to be mocked in the Valley unless it involves whipping nuns into a frenzy about climate change so that they can take center stage at the annual meeting.
The excitement over something new in tech draws investors, but the genius of ideas and takes structure to turn that idea into a business. Both investors and boards should know by now that when it comes to Silicon Valley investments: Do not trust and verify everything.