Manish Lachwani, founder and former CEO of onetime unicorn startup HeadSpin, was arrested on charges that he dramatically inflated his company’s success to investors, causing them to hand over $80 million on false pretenses.
Lachwani, who had been CEO of the mobile app testing company up until May of last year, is facing a count of wire fraud and a count of securities fraud in a criminal complaint filed Wednesday by the U.S. Department of Justice. Separately, he was also sued over the same matter by the U.S. Securities and Exchange Commission.
If convicted, Lachwani could face up to $5.25 million in fines and 20 years in prison.
Lachwani’s most serious alleged offenses had to do with making false claims about company revenue. When pitching investors for its Series C funding round back in February 2020, he claimed that HeadSpin had “achieved strong and consistent growth in acquiring customers and generating revenue,” according to the DOJ.
The lie apparently paid off: HeadSpin secured $60 million in funding from Tiger Global for the round, bringing its valuation to $1.16 million. But things began to unravel shortly afterwards.
Months before the government brought its case, company board members raised concerns and launched an initial investigation. By August of last year, HeadSpin was forced to return $95 million to investors when the board discovered that the company would only post $15 million in ARR, despite its $100 million forecast.
After the investigation, HeadSpin’s valuation was brought down from unicorn status to $250 million. Lachwani had been replaced by Chief Sales Officer Rajeev Butani that May, though the move went unreported for several months.
According to the DOJ, Lachwani “provided investors false information that overstated HeadSpin’s annual recurring revenue...by approximately $51 million to $55 million.” In addition to lying about revenue and growth, Lachwani sold $2.5 million of his own HeadSpin shares after one of the company’s funding rounds.
While Tiger Global is known for its cash-heavy, hands-off approach to investing, its lack of due diligence in relation to HeadSpin may have cost the firm millions in lost funds and as well as a blow to its reputation. Others who invested in the company include Dell Technologies Capital, Iconiq Capital, Kearny Jackson, and Alpha Square Group. The board of directors, meanwhile, was headed by Nikesh Arora, CEO of Palo Alto networks and former SoftBank president, who also led the internal investigation.
Lachwani founded HeadSpin in 2015 with Brien Colwell, a former Palantir and Quora engineer. In the wake of the investigation and arrest, Colwell remains the company's CTO and is not being investigated by the DOJ or the SEC. Both departments say the investigation is ongoing, though it’s unclear when a trial will take place.