Venture capital firm Ignition Partners of Bellevue is reacting to the news that two former executives at its portfolio company Entellium Corp. have been arrested and charged with wire fraud. An Ignition spokeswoman provided the following statement this afternoon:
This news is obviously a jolt to Ignition and other investors who invested in Entellium based on financial information provided by the company’s former CEO and CFO. Unfortunately it appears that the former CEO and CFO were representing false financial information and overstating the company’s performance. It is now a legal matter and Entellium is cooperating fully with authorities.
According to a criminal complaint filed in federal court (PDF, 9 pages), Ignition invested over $19 million in Entellium. See this earlier post to read the executives’ resignation message.
– Eric Engleman, eengleman@bizjournals.com
2 responses so far ↓
1 Former Entellium executives charged with fraud // Oct 8, 2008 at 3:33 pm
[...] UPDATE: Ignition Partners calls Entellium saga ‘a jolt’ [...]
2 Anthony Mitchell // Oct 9, 2008 at 5:57 pm
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?
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