Sometimes weeks after a headline exits our news feeds, a story still resonates. That’s been the case for me and a fraud suit the Securities and Exchange Commission filed in late August against Manish Lachwani, former CEO of once high-flying software startup HeadSpin.

In its six-year history, Palo Alto-based HeadSpin raised around $116 million for its platform, which helps companies optimize customer digital experience across mobile and web. It did so the way most companies do–with fundraising pitches talking up sharp growth and big-name clients

Trouble is, apparently neither the numbers nor the client list were accurate. The SEC’s complaint charges that Lachwani used “inflated valuation and financial numbers to deceive investors into pouring approximately $80 million into the company between 2018 and 2020.”

Fraud suits crop up frequently, and here it’s not the number or the motive that I find most interesting. What sticks out instead, is where much of the alleged deception cropped up: In the startup’s pitch deck.

That’s because the pitch deck is arguably the most hype-driven thing in the startup universe. It’s where entrepreneurs put their hockey-stick projections of future growth, brag about the trillion-dollar markets they’re poised to disrupt, and play up the famous brands that have paid even a paltry sum for their products.

As someone who has spent a couple decades regularly listening in on startup pitches and pitch events, my observation is that some hype is fairly standard. Projections based on the most optimistic possible scenario are pretty much expected.

But HeadSpin delivers an important lesson: The SEC also cares about what’s in your pitch deck. While a bit of hyperbole about how your future valuation will exceed Apple’s may be acceptable, phony numbers are not.

Pitch deck lies

In HeadSpin’s case, the agency’s complaint features a number of references to pitch deck malfeasance, including the following:

• “The 2018 Pitch Deck that Lachwani shared with Series B investors falsely asserted that HeadSpin had experienced ‘No Customer Loss and Triple Digit Growth.’ In reality, HeadSpin had lost customers that decided to stop using HeadSpin’s services.”
• “The 2018 Pitch Deck also included logos for at least 50 major companies, a number of which were not active HeadSpin customers.”
• “Lachwani also provided a 2018 PitchDeck to Series B investors that, among other things, listed falsely inflated ‘revenue commitment’ amounts and growth percentages for specific big-name customers”
• “The deck included the logo of a highly successful Silicon Valley-based computer and cellphone manufacturer even though (the customer’s) sole purchase expired more than a year earlier and was not renewed.”

The pitch deck statements fit into a broader pattern of deception, per the SEC, which included  creating fake invoices, altering real invoices, and inflating HeadSpin’s annual recurring revenue by falsely increasing the values of customer deals.

It didn’t work out well. Lachwani’s fraud unraveled in the spring of 2020, following an internal investigation, per the SEC. Subsequently, he was forced to resign as CEO, and HeadSpin revised its valuation down from the $1.1 billion claimed during the Series C round to approximately $300 million.

What sophisticated investors missed

Obviously, this was not the outcome investors wanted. But while VCs are sophisticated investors expected to do their own diligence to avoid falling for excessively rosy projections, not all lies are easy to detect.

The sophisticated investor moniker would certainly apply to ICONIQ Capital, which led HeadSpin’s Series B and co-led its Series C. The San Francisco-based investment firm, with approximately $67 billion in assets under management, has a client list that includes Mark Zuckerberg, Sheryl Sandberg, Jack Dorsey and Jeff Weiner.

HeadSpin’s other backers include a long list of individual investors, along with Tiger Global Management, Google’s GV, Dell Technologies Capital and others. Overall, these are investors who are expected to know their way around a pitch deck.

The takeaway from investors from the SEC’s action around HeadSpin seems to be this: If you fell for over-optimistic projections, that’s on you. But if founders deceived you about the past and current state of their business, that’s an area where regulators might also step in.

For startups in fundraising mode, meanwhile, flattering pitch deck presentations are probably still OK: Feel free to play up the size of your target market and talk a lot about your highest profile customers, investors and advisers. But keep the internal performance numbers real. Exaggerated ARRs can have real-world consequences.