Ex-CEO of 'unicorn' app startup HeadSpin heads to jail after BS'ing investors

Lachwani faked it but didn't make it

Manish Lachwani, former CEO of app testing firm HeadSpin, has been sentenced to 18 months in prison and will pay a fine of $1 million.

The co-founder of the software-as-a-service biz pleaded guilty a year ago to two counts of wire fraud and one count of securities fraud, in response to charges filed by the US Justice Department in 2021.

Today's sentencing should send a message to other entrepreneurs who may be tempted to ... 'fake it until they make it'

"This defendant admitted he lied about his company’s revenue and customers to attract funding from investors, including many in Silicon Valley," said US Attorney Ismail Ramsey in a statement Friday. "Today's sentencing should send a message to other entrepreneurs who may be tempted to cross the line into fraud and to 'fake it until they make it.'"

That's most of the valley screwed, then.

Lachwani co-founded HeadSpin in 2015 and served as its CEO until May 2020. According to his plea agreement, he misled investors by giving them financial information that wasn't accurate. That allowed the biz to appear to be a "unicorn" – a startup worth a billion bucks or more – until it became evident it was more of a donkey with a fake horn on its head.

As described in the government's complaint [PDF], Lachwani understood the startup's valuation depended upon reporting substantial annual recurring revenue. And he was able to make it look as HeadSpin had more such revenue than it did because that number came from spreadsheet entries he could alter without oversight.

"Lachwani inflated HeadSpin’s ARR by falsely increasing the values of several existing customer deals of all sizes, ranging from big deals with Silicon Valley heavyweights to low dollar-value deals with smaller players, and relying on uncommitted amounts from non-binding agreements with other customers," the complaint stated. "He entered the fabricated amounts into the company’s detailed ARR-tracking Spreadsheet that he alone controlled."

After the board of directors was alerted to potential irregularities in March 2020, Lachwani's scheme ultimately came to light. In 2019, HeadSpin had annual recurring revenue of about $10 million, rather than a claimed $80 million, according to court documents.

HeadSpin subsequently revised its valuation from $1.1 billion to $300 million, and returned 70 percent of investor funds from the firm's B and C funding rounds in an effort to address its founder's misdeeds. The biz raised more than $100 million from investors between April 2017 and April 2020.

When the app testing service settled with the US Securities and Exchange Commission in 2022 – without denying or admitting any wrongdoing – HeadSpin's remediation efforts included a senior leadership refresh, an expanded board, and the implementation of actual financial controls.

Lachwani joins a growing list of imprisoned tech fraudsters that includes Sam Bankman-Fried, sentenced to 25 years in prison last month; Elizabeth Holmes, sentenced to 11 years behind bars; Ramesh "Sunny" Balwani, sentenced to almost 13 years; and Trevor Milton, sentenced to four years, among others. Last month, the US Department of Justice said its fraud section prosecuted more than 100 white collar crime cases over the past two years, a record for the agency. ®

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