Venture Companies Gone Bad
The CEO and CFO of local software company Entellium have been arrested by the FBI and charged with fraudulently inflating the firm’s revenue in order to bring in tens of millions in VC investment. Apparently, $3.7 million in revenue over the last three years was represented as $15.4 million. God knows why these guys did this, or thought they could get away with it. Even if the business became a smashing success, there’s no question auditors (or IPO underwriters) would have discovered the fraud.
Some choice quotes from the one-time darlings of the CRM business:
[former] CEO Paul Johnston, in 2004 – “We are the old-fashioned type of entrepreneurs where you have to get revenue in order to spend.” (Assuming “get” means “make up”, that is).
[former] CFO Parrish Jones, in 2007 Entellium is preparing for “hockey stick type growth.” (no doubt traced on an actual hockey stick)
Johnston again: “Sell customer gratification, not things.” (because reality is so over)
The sad part about this for the rest of the venture community is the inevitable erosion of trust. So many companies are fast-moving, without the audit committees and corporate governance structures found in large public companies. For the most part, such structure should be unnecessary, given the competence and focus of management on making the business grow (and the relative simplicity of the revenue structure of early-stage growth companies). However, all it takes is a nasty case like this to show investors how easily that trust can be spoiled.
Kudos to Entellium’s attorneys at Wilson Sonsini for proactively coming forward to reveal the fraud. As for Johnston and Jones? Here’s a tip – check Avvo’s list of top Seattle criminal lawyers.
