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No one looked under the Canopy

A very interesting story has emerged in the last few days about a venture-backed company called Canopy (coverage from TechCrunch and peHUB).

It looks like management defrauded the investors by lying about the company's financials.  There was an auditor hired, but no audit done.  Now the VCs have all pulled the company from their websites, which is never a good sign.

This is a company that raised a lot of money and, until recently, employed a lot of people.  Now it is likely to be stuck in a lot of litigation in and among investors and employees.

I don't know anything about this situation, but I've been on enough boards to know that if management wants to fool you, you can be fooled.  Board members rely on what they hear from the management team and, unless they slip up, you can be fooled for a while.  The surprising thing is that, if this is the level of fraud that's alleged, you'd think that someone at the company would have spoken up long ago.

One key thing I have learned over the years is to maintain casual contact with employees at all levels of a company.  It's great to be able to stop by to ask them how it's going.  This is particularly true for key people in finance and engineering.  Both groups tend to be honest and direct.

Secondly, I always maintain direct contact with the service providers used by a company, particularly lawyers and accountants.  They tend to have a good sense of whether or not things are on the up and up.  In the case of Canopy, one call to the auditors would have determined, allegedly, that they never did an audit!

I'm not picking on the VCs involved as I don't know the whole story.  But, there is no substitute for 'management by walking around', or the investor equivalent.  Be present, and talk to the people on the front lines.

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