Someone told me the other day that there are people in Silicon Valley who are starting companies that get funded. They then use these funds to buy other existing smaller companies. When they buy those new companies, they actually get kickbacks. I.e, the owners of the smaller companies that get bought pay them cash to buy the companies.
The expectation is that the bigger funded companies will eventually fold, losing the investors a bunch of money, but with no loss to the founders. The founders make a salary, they spend a lot of investor cash on themselves directly via this kickback scheme, and they pull as much as they possibly can from the companies.
The person who told me, who happens to be an angel investor, says that’s why a lot of old school angels have stopped investing in a category of company. But he said that there are investigations going on by the federal government.
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Sounds like Groupon!
Pretty shocking if true. Is it possible that behavior emerges not as a deliberate action but just as a byproduct of short-sighted trend-following entrepreneurs in a hot segment?