I don't think this happens if someone like Kleiner Perkins had a 10% or 20% stake in Dragon.
A serious VC partner would have been more likely to realize that Goldmans sent out the junior varsity here, and would have the standing and confidence to insist they do better or be fired. They would have asked better questions about the due diligence and been more attentive to valuing the buyer -- valuation is what VC firms do -- and might have spotted the problems themselves. In the worst case, where this disaster still strikes, Goldmans would be far more likely to be reasonable about its responsibilities, lest it spoil its reputation with a well-connected VC.
But maybe I exaggerate the business and financial knowledge of tech VC types?
I don't much like the idea of allowing big VC firms to collect rents based on their reputation. But you cannot expect fee-based labor to be as careful and paranoid as you must be on this sort of thing. Only partnership brings that level of attention. When the stakes get this high, you need a partner capable of taking these responsibilities. If your financial partner or CFO isn't up to the task -- and Dragon's CFO was not -- then you have to fill that gap in the _partnership_.
Another solution would be bringing in a CFO with an equity stake, but this raises the same problem of financial expertise evaluation that sank the founders here.
Yes you do exaggerate the business and financial knowledge of tech VC types.
During the late 90s boom, EVERYONE was snared in. KP, Sequoia, pretty much all the VCs lost a ton of money. Doubtful that their so-called expertise would have saved the Bakers.
Re-reading the article again, it seems like the Bakers did in fact have their suspicions. The mystery memo should have been a huge warning sign. The fact that Goldman sent bankers in diapers should have been an even bigger sign. There was one comment from the founder of Dragon: "If L&H was able to make so much money out of a lousy product they'd be able to make more out of ours.." which was a little painful to read.
Are we sure Seagate didn't sell or otherwise collar the value of their stake soon after the acquisition? According to the article, there were about 60 days before the scandal erupted:
"The deal closed on June 7. By Aug. 8, the merged companies were in crisis amid reports that L.& H. had cooked its books."
A serious VC partner would have been more likely to realize that Goldmans sent out the junior varsity here, and would have the standing and confidence to insist they do better or be fired. They would have asked better questions about the due diligence and been more attentive to valuing the buyer -- valuation is what VC firms do -- and might have spotted the problems themselves. In the worst case, where this disaster still strikes, Goldmans would be far more likely to be reasonable about its responsibilities, lest it spoil its reputation with a well-connected VC.
But maybe I exaggerate the business and financial knowledge of tech VC types?
I don't much like the idea of allowing big VC firms to collect rents based on their reputation. But you cannot expect fee-based labor to be as careful and paranoid as you must be on this sort of thing. Only partnership brings that level of attention. When the stakes get this high, you need a partner capable of taking these responsibilities. If your financial partner or CFO isn't up to the task -- and Dragon's CFO was not -- then you have to fill that gap in the _partnership_.
Another solution would be bringing in a CFO with an equity stake, but this raises the same problem of financial expertise evaluation that sank the founders here.
None of which excuses Goldmans.