Then Manish Lachwani founded the Silicon Valley software start-up HeadSpin in 2015, he inflated the company’s revenue numbers by nearly four times and falsely claimed that companies including Apple and American Express were customers. He showed a profit where there were losses. He used HeadSpin’s cash to make risky trades in tech stocks. And he created fake invoices to cover it all up.
What is especially fascinating is how easily Mr. Lachwani, now 48, is all that.
While HeadSpin has raised $117 million from top tech investors — including GV, the venture capital arm of Google’s parent, Alphabet; and Iconiq Capital, which helps manage Mark Zuckerberg’s billions — it has no chief financial officer, no human resources department and has never been audited.
Mr. Lachwani used that lack of oversight to paint a higher picture of HeadSpin’s growth. Even though its main investors knew the start-up’s financials were inaccurate, according to Mr. Lachwani’s lawyers, they chose to invest anyway, eventually propelling HeadSpin to a $1.1 billion valuation in 2020. When pushed of investors Mr. Lachwani to add a chief financial officer and share more details about the company’s finances, he simply turned them away.
These details came out this month in the submissions in the US District Court for the Northern District of California after Mr. pleaded guilty. Lachwani three counts of fraud in April. He is scheduled to be sentenced next month, with a maximum penalty of 20 years in prison for each count.
The lack of controls at HeadSpin is part of an increasingly noticeable pattern among troubled Silicon Valley start-ups. Over the past decade, investors in tech start-ups have been so eager to back hot companies that many have often overlooked reckless behavior and relinquished basic controls such as board seat, all in the service of rapid growth and disruption. Then, when founders take the ethos of “fake it until you make it” too far, their investors are often unaware or helpless.
FTX, the cryptocurrency exchange that collapsed last year, has a three-person board with little influence over the company, tracks its finances in QuickBooks and uses a small, little-known accounting firm. Theranos, the failed blood testing company, has not had a financial audit in six years. The founders of those companies were convicted of fraud.
Now, in the midst of a start-up shakeout, more scams have started to surface. The founder of the college aid company Frank was charged with, the internet connectivity start-up Cloudbrink was sued, and the social media app IRL is being investigated and sued. Last month, Mike Rothenberg, an investor in Silicon Valley, was found guilty on 21 counts of fraud and money laundering. On Monday, Trevor Milton, founder of electric car company Nikola, was sentenced to four years in prison for lying about Nikola’s technological capabilities.
“Management became a little lax during the bubble,” said Healy Jones, vice president of financial strategy at Kruze Consulting, a provider of financial services for start-ups. Lately, Mr. Jones said, he’s noticed venture firms doing more due diligence on potential investments, but “they probably shouldn’t get a gold star for fulfilling their job description. “
Through a lawyer, Mr. Lachwani declined to comment.
Rajeev Butani, who took over as HeadSpin’s chief executive in 2020, said in a statement that the company’s board acted immediately after discovering Mr. Lachwani’s behavior that year and cooperated with the government’s investigation.
“We are grateful to our customers who have supported us on the journey,” added Mr. Butani.
Mr. Lachwani started HeadSpin in 2015 in Palo Alto, Calif., after selling his previous company, Appurify, to Google. Businesses use HeadSpin’s technology to test and track their apps across geographies and devices. The start-up quickly raised money from investors including SV Angel, Felicis and GV.
Soon there were red flags. HeadSpin’s financial statements often came months late, if at all, investors said in legal filings. The company’s finance department consists of an external accountant who mostly works from home using QuickBooks, a basic system designed for small businesses. HeadSpin has no human resources department or organizational chart and is not audited.
In 2015, Mr. Lachwani saw an opportunity to cash in on HeadSpin’s cash reserves. “It’s very sad to see money reaping such low interest,” he wrote in an email that year to Karim Faris, a GV investor who sits on HeadSpin’s board.
Advised by Mr. Faris is Mr. Lachwani to keep money in “very conservative and liquid instruments.” But over the next several years, Mr. Lachwani used HeadSpin’s cash to buy stocks and options in tech companies including Snap, Roku and Tesla, according to bank statements filed as part of the lawsuit. At one point, he sent Mr. Faris a bank statement showing the money was in cash and cash equivalents, according to Mr. Faris’ declaration.
A GV spokesman declined to comment.
By 2017, Mr. Lachwani inflated HeadSpin’s income to investors by including income from customer contracts that had not yet been completed and one that had been canceled, he said in his plea agreement.
HeadSpin investors tried and failed to assert influence. Mr. Faris and Nikesh Arora, the chairman of HeadSpin, provided a list of candidates for the chief financial officer hire, they said in the declarations. Iconiq pushed Mr. Lachwani to add more controls, according to claims made in a presentation included in a court filing.
Mr. Lachwani resisted Iconiq’s demands, resulting in “a rift between them” that led the founder to want Iconiq’s investment back, the presentation said. Mr. Lachwani never hired a chief financial officer.
Iconiq and Mr. Arora did not respond to requests for comment.
HeadSpin’s accountant, Sana Okmyanskaya, said in a declaration that Mr. Lachwani instructed her to add revenue from new contracts to the company’s books. When he asked to see the contracts, she ignored him.
“He seems busy and seems to often work late into the night,” she said in the declaration.
Once sent Mr. Lachwani invoices to Ms. Okmyanskaya that he changed to include money that was never invoiced, his lawyers said in a filing. Ms. Okmyanskaya, who did not respond to a request for comment, said in her declaration that he also lied to her about the details of the contracts to explain the inconsistencies.
In 2019, Mr. Lachwani cashed out $2.5 million of his own shares in HeadSpin, selling them to an investor.
Investors poured more money into HeadSpin in 2020, valuing it at $1.1 billion. At the time, Stefanos Loukakos, a tech executive, joined the company as senior vice president and uncovered a pattern of misrepresentations by Mr. Lachwani.
In March, Mr. Loukakos shared his concerns with Mr. Arora in a 16-slide presentation presentation, which was later filed in court. Mr. Lachwani said HeadSpin has more than 20,000 devices on its network, for example, but Mr. The real number is likely to be closer to 2,000. When asked by Mr. Asking an engineer about the difference in Slack, the engineer replied, “lol ask manish.”
Mr. Loukakos’ presentation also included text messages showing Mr. Lachwani swearing at employees and abruptly firing them, including one worker who was in the middle of a video call with a client.
HeadSpin’s board launched an investigation. Mr. Lachwani stepped down in May 2020 and agreed to return $1.9 million of the $2.5 million he cashed out. The company restructured its finances and returned money to investors who wanted out.
HeadSpin continues to work. In March, this announced new funding of an undisclosed amount from Atlassian Ventures. An outside accountant valued the company at $302 million, more than 70 percent below its 2020 value.
Ahead of his sentencing next month, Mr. Lachwani’s lawyers made the case for a lesser sentence. Despite Mr. Lachwani’s misrepresentations, they said, none of HeadSpin’s investors actually lost money.
“Sir. Lachwani did not need to say false or misleading things to create a successful company,” his lawyers wrote, “but he did.”
