We normally don’t focus on one region or another, but instead on general trends in the startup space. However, this post is different…
Before I go on about it, I want to commend John Cook on his great coverage of the Entellium debacle and fraud. Without his hardwork, this criminal activity would have taken a lot longer to come out in the detail he has provided. For the full background, check out John and Todd Bishop’s blog.
I can’t even begin to go on about what a shock this was to the Seattle community. That two people could have perpetrated a fraud at this level for so long is astounding. To be honest, I am also surprised that no one else in the firm seemed to know about it…
Overall, the things that shocked me the most are:
- How the two criminals that began this activity could think they could get away with it. What were they thinking and maybe even more importantly, what drove them to this? Greed or stupidity? Both?
- An entire company is wracked to the core and honest and hardworking employees lost their jobs and everything they have been working for. When we work somewhere, we place the hopes and dreams of individuals, families, our futures and hopes into the company. For these people, that is all gone. Enron anyone?…
- Investors are out ~$50M dollars. $50,000,000. Not chump change, unless of course you are the US Congress (sorry, I digress). How many viable companies could have been funded, how many employees could be employed, how many life changing technologies and services could be provided for that amount? Now, NOTHING.
- Where was the oversight? Where was the Board of Directors? They have a fiduciary responsibility to Investors, Customers, Employees and everyone else to ensure that nothing like this happens. They don’t have their Board of Directors listed at this time, but I would be interested in chatting with them about their take on this debacle. (you can contact me at nathan [at] npost [.] com.
I sincerely hope that this hole thing doesn’t negatively affect the startup scene in Seattle. It is a hard working, honest group with integrity. My hope is the the perpetrators are brought to justice, that some capital is reclaimed by investors, customers, etc. and that the people who worked long and hard and honestly at Entellium find good jobs.
How pathetic!
About nathan kaiser
Illegally pushing the envelope and misrepresenting revenue was not unusual here in Seattle before the dot-com crash. It’s an Enron mentality that hasn’t totally gone away.
Is misrepresentation confined to the startups’ side of the equation? How many venture funds honestly portray or even mention their failed investments?
“We aim to have one big success out of ten tries,” a fund could announce, “and in the interests of full disclosure, here is a list of our turkeys and a discussion of lessons learned.”
It’s natural for VCs to put a positive appearance on what is often a chaotic and random process based more on personal connections than active oversight. But is it natural to maintain a communication hierarchy that isolates angels and VCs from the people and operations in the operations they are ostensibly supporting?
How many second-level people in startups have sat silently in meetings where VCs were setting the direction of the enterprise, only to go back to the office and be told to do something entirely different? The longer a train stays off the track, the harder it is to turn it around, especially in the CRM space.
Lack of genuine oversight and a closed door policy invites debacles like Entellium. Unrealistic marketing expectations are also to blame.
In Seattle pre-dot-com-crash, a 50-50 split between marketing and other expenses in startup budgets was the norm. Now we commonly see only 35-40% of startup budgets going for marketing.
The sales cycle in CRM is often 6-18 months after leads have been identified. It can take six months to build up initial leads. This means that you can run for two years before the first fruit starts falling from the trees.
For companies with offshore software development and service centers and no established presence in U.S. markets, a more appropriate formula might be to set aside twice as much money for sales and marketing than for everything else combined. Entellium got that wrong. Who else is on the wrong side of that equation?
Nathan,
Thanks for the shout out. Todd, Eric and I have been working hard to figure out why this happened.
It is an interesting, but sad story. And the questions you raise are good ones.
As to point number four (regarding oversight) we are looking into that. I think our latest story on the lack of auditing at the company provides some more insight.
http://www.wherearejohnandtodd.com/?p=604
Thanks again,
John Cook