This week has some behind the scenes war stories:
Questionable behaviors in Constru-Tech deals that Patric and Shub have seen over the years, and led them to pass on those deals
Founders botching revenue recognition and other cases of book-cooking
Founders setting up hidden corporate structures which could lead to personal gains
VC's blocking deals and making deals for personal enrichment at expense of the startup or their partners
Straight up, Board members charged with bribery accusations
Revenue Recognition Issues Lead to Botched Round in an Asset-Heavy Constru-Tech ?
A deal for an asset-heavy construction tech company fell apart at the last minute when lawyers and accountants conducting due diligence discovered issues with their revenue recognition being off by a large margin, termed "creative accounting" in a phone call. The $35 million financing round set to close in 48 hours collapsed, except for a drastically reduced insider round scrambled over night. Shub notes this demonstrates deals unraveling at the final stage due to poor revenue recognition, which unfortunately was more common than publicly known among asset-heavy founders over the last few years. Patric and Shub recommend founders to voluntarily do yearly big-4 audits to prevent any last minute issues like this.
VC Abusing Power to Block Deals for Quid Pro Quo Enrichment ?
A VC sat on the boards of two companies with significant shareholding in both. An outside investor looked at both firms to invest, but chose only one to invest but not the other. Despite interest in funding the second firm, this VC/Board Member sent an email saying they would not approve it unless the VC firm also invested in the first company. Shub categorizes this as personal greed and ego at the expense of founders and shareholders, while Patric highlights the abuse of a board oversight role to hold companies hostage.
Prominent Founder Accused of Past “Book-Cooking” by Their Investors ?
A high-profile founder with a prestigious background started a new company after their previous one scaled tremendously. However, contacts made vague references to "funny business" and "taking liberties" with the numbers at the past firm. One directly stated the books had been cooked there, leading to a shocking unraveling that demonstrates the need to probe warning signs. Patric highlights that with enough accusations, at minimum something is clearly wrong with the processes.
Founder's Side Company Secretly Profiting ?
An AEC-Tech software founder convinced their board that cheaper overseas development resources would help growth. Years later, it was discovered the offshore subsidiary set up was privately held by the founder rather than the VC-backed firm. Essentially the core company was paying for developers at the founder's other business, having the potential to enrich the founder in a deceptive arrangement. Patric emphasizes the complete misalignment and hidden nature, while Shub notes the VC-backed firm suffers as the side company scales.
VC/Board Member in a Constru-Tech Charged with Bribery Accusations ?
A high-profile AEC firm had an incident in which legal/tax authorities singled out one of their board members for allegedly bribing officials to generate business. While the true extent is unknown, it is shocking such an accusation was leveled at a board member of a VC-backed company. Patric states that even the allegations were untrue, the core issue is that this already demonstrates poor board member behavior, since their role should focus on supervision as a sparring partner, not getting involved with operating the business.
Siblings Collude on Shaky Deal for Promotion ?
Two VC siblings in two different VC firms schemed to lead the follow-on funding of a very early company just months after the first sibling had done the first round, with the result that one sibling could make partner by having the prominent VC of his sibling invest in his deal. The second sibling committed a substantial portion of the round from his firm, but on a so-called “sub-threshold cheque” without having to seek approval from their partners. An additional VC from their shared friends network filled out the remainder. Result: The first sibling got the promotion after the round was closed. Shub suggests the plan was executed perfectly, while Patric wonders if their limited partners would ask questions if they knew about the collusion.
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Keywords: construction tech, AEC industry, revenue recognition, creative accounting, financial diligence, venture capital, founder fraud, cooking the books, board member bribery, overseas subsidiaries, VC ethics, VC greed, VC self-dealing