The Information this morning reported that Headspin, a network performance software provider, restated its revenues — down from $100 million annual recurring revenue to $15 million ARR after an internal audit. It had fired its co-founder and CEO, Manish Lachani. Headspin was also returning $95 million, a hefty chunk of capital it had raised during its most recent financing round. The company’s valuation – $1.16 billion – was going to be revised downwards, to $250 million.
Wow! That is some jaw-dropping revelation and Enron-style skulduggery. And it also reveals rot in the Silicon Valley ecosystem that is far worse than this one company. It also shows that some folks know how to exploit Silicon Valley’s one real Achilles heel — Fear of missing out or FOMO. Here what we have is a scenario that occurs all too often.
Thus opens ‘Cooking the books’, a recent blog post by Om Malik.
Say, you have two or three well-placed people talking up a deal (or a founder.) They tell their network of investor friends to take a look at the company for a potential investment. The words start to fly. And if those two well-placed deal sources have a good track record — aka if they have made some good investments and referrals — the words take on an urgency. The deal gets momentum, and more often than not, investors get overcome with FOMO.
They know that others are knocking on the company’s door with a pot of gold, so they better hurry up. The FOMO leads to looser diligence and bending of rationality. More often than not, the deal gets done by capitalizing on the vanity of the founders. These days Silicon Valley has been afflicted by lunacy, affectionately named after a fictitious being, unicorn. A unicorn in Silicon Valley parlance is a company valued at over a billion dollars. No matter how rational, smart, or intelligent, every founder wants to be the head of a unicorn. Never mind that unicorns are mythical and non-existent in real life.
Om mentions Pinterest, Uber, Spotify and Airbnb as examples, but I can think of plenty more.
Unfortunately, I don’t see any resolutions on the horizon because that would involve admitting that the system is not only broken, but an illusion. And that would stop the money flowing.