Seth Bannon and the Case of the Empty Suits

So Who Is Seth Bannon?

First of all I should admit that I don’t know Seth Bannon. I only know what I’ve read about him online. However he did call me once, wanting me to pull down this article. After talking to him, I decided to re-work it instead.

To be fair, his story reinforces for me, the caricature of a certain kind of young ‘entrepreneur’ (we used to call them businessmen – but I guess since entrepreneur is French, it sounds more cultured and that would make writers who use it sound more effluent). So it isn’t the real Seth Bannon that I write about, but someone whose story I can use to illustrate a point.

seth-bannonStart by reading the New Republic article  by Noam Scheiber

An Obama campaign alumnus, Bannon frequently appeared on panels at conferences like South by Southwest. He inspired mentions not just in tech publications, but in business and general-interest outlets likeThe Economist and The Atlanticwhich gushed that Amicus had “helped activists in Minnesota and Washington win same-sex-marriage campaigns.” In 2012, he and his co-founder Ben Lamothe were named to the Forbes “30 under 30” list of social entrepreneurs.

– then take a look at his blog:

CLIMB HIGHER (…it seems like his failure may have taught him something useful…)

Seth Bannon’s case in many ways is a symptom of what is wrong with the startup ecosystem. In an earlier century Seth Bannon might have been called a ‘confidence man’ – these days he’s more likely to be called an ‘entrepreneur’, but the truth is that he probably just raised too much money, before he knew what to do with it.

The fact is, investors gave his company too much money before the company had earned it – and without conducting even rudimentary ‘due diligence’. They deserved to lose their money. 

So how did Mr. Bannon’s startup – Amicus – raise almost $4 million before investors became aware that it was effectively bankrupt?

According to Scheiber:

Before Y Combinator, Bannon raised money from a handful of small-time angels—independent investors with modest portfolios who gave ten and twenty thousand dollars a piece. These angels often skimp on due diligence because they have no partners or support staff to assist them and the sums they invest are small.

Y Combinator itself admits –

“We invest relatively small amounts of money across many companies, and as part of that, we don’t do heavy diligence,”

Even the venture capitalists and institutional angels didn’t do much due diligence – relying instead on Y Combinator’s blessing.

So a startup relying on financial statements that had been prepared by management – without any involvement by an independent CPA – received almost $4 million in equity without anyone doing due diligence. Investors should know better than to invest in a company without at least seeing financial statements that have been professionally compiled.

That isn’t to say that all startups prepare ‘optimistic’ financials in an attempt to mislead investors. More often they simply don’t know how to prepare accurate financial statements. Of course, some have said that Seth Bannon had a habit of lying. Did his company deliberately misstate their financial position?

In almost 30 years as an accountant, I’ve learned to have a great deal of skepticism when it comes to financial statements that have been prepared by management. Most startup CEOs don’t know how to read a set of financial statements, and wouldn’t know whether they have been misstated – or not.

INVESTORS SHOULD INSIST ON FINANCIAL STATEMENTS PREPARED BY A CPA

The point is that any investor should insist on financial statements that were reviewed or at least compiled by a CPA. Although statements that have been ‘compiled’ by a CPA will contain a disclaimer – called a ‘Notice To Reader’ that reads as follows:

Readers are cautioned that these statements may not be appropriate for their purposes.

While the disclaimer might be relied upon by the CPA to avoid liability, there is a requirement that CPAs don’t associate themselves with financial statements that they know to be misleading. In Mr. Bannon’s case it is hard to understand how a CPA would miss the fact that a small startup  owed approximately half a million dollars in employee source deductions.

Of course it wasn’t only investors that didn’t do their due diligence. Business publications like the Economist, the Atlantic and Forbes could have done a better job at getting to know the man behind the story.