AllHere founder arrest shows it's easy for startups to scam VCs
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Another "fake it 'til you make it" founder has wound up in handcuffs, after raising millions of dollars from venture capitalists.
Why it matters: This is a reminder of how easy it is for young startups to defraud their investors, who rely almost exclusively on management for financial data.
- Past examples have included Canopy Financial and Ozy Media.
Driving the news: Joanna Smith-Griffin, founder of an ed-tech app for reducing student absenteeism, was arrested earlier this month and charged with securities fraud, wire fraud, and aggravated identity theft.
- Smith-Griffin, a onetime member of the Forbes "30 Under 30," faces decades in prison.
Zoom in: Her startup was called AllHere, and raised around $4 million in seed funding led by ReThink Education. In 2021 it raised an $8 million Series A round led by Spero Ventures. Both Rethink Education and Spero received board seats.
- According to the Justice Department complaint, however, Smith-Griffin lied to investors about nearly everything — including revenue, customer contracts, and cash-on-hand. And she profited, selling around $750,000 of shares into the Series A.
- Many of these alleged falsehoods were made during Spero's due diligence for the Series A, and continued long after the money was raised. AllHere also allegedly lied when trying to raise $35 million in Series B funding, although that (unnamed) firm seemed to realize something was off and didn't invest.
- The company also requested, and received, $250,000 in bridge financing from its VC backers in the aftermath of Silicon Valley Bank's collapse, in order to meet payroll that was actually around $200,000 lower.
- Finally, Smith-Griffin is accused of embezzling around $600,000 from the company for her personal use, usually via small wire transfers via PayPal or Zelle.
Behind the scenes: Smith-Griffin got caught when an outside accountant sent financial data directly to one of the company's investors from ReThink Education, rather than funneling it through Smith-Griffin.
- She allegedly tried to stem the damage by creating a fake email address and fake documentation, posing as an an outside financial consultant, but by then the jig was up and AllHere was heading toward insolvency and closure.
- It's not the first time a founder tried to pull the wool over investors' eyes by masquerading as an accountant, and likely isn't the last.
- AllHere's former director from Spero Ventures declined to comment, while one from Rethink Education (who's since left the firm) also declined. Another from Rethink (still there) didn't respond.
The bottom line: Trust without verification is the norm at early-stage startups, but the time saved — and maybe even the deal won — isn't worth the pain and embarrassment if it all goes awry.
Read the full complaint:
