Yahoo Finance The British tech start-up whose success story seemed too good to be true – because it was
David Richards was on top of the world. As the British entrepreneur flew from Manchester to New York last month, his software company Wandisco was making plans for the same journey.
The company was preparing for a US listing that could value it at well above the £900m that its UK listing did.
Shares in the big data specialist had risen almost fivefold in just 12 months, valuing Richards’ stake in the business at around £25m. His new wealth would boost a charitable foundation set up by Richards and his wife Jane, who a year earlier had been awarded MBEs for donating laptops to schoolchildren during the pandemic.
Wandisco’s rise to become one of Britain’s most valuable listed technology companies, a decade after it floated and in a year when other software companies were slumping, seemed too good to be true. On Thursday, the company confirmed it.
In a surprise update to investors, Wandisco said it had uncovered “significant, sophisticated and potentially fraudulent irregularities” in its accounts linked to a single employee, which meant the company had dramatically overstated annual revenues.
An investigation found that its revenues were actually 60pc lower than previously stated, leading to “significant going concern issues”.
Shares in the company were suspended pending further investigation, which the company said would be handled by external advisers.
Only when trading resumes will the full extent of the damage be revealed. But the alleged fraud is just the latest chapter of a years-long drama – as well as the latest cloud hanging over Britain’s tech industry.
Richards, the son of a Sheffield steelmaker, is a serial entrepreneur who founded Wandisco in 2005 with Yeturu Aahlad, a computer scientist he had met at a cocktail party. The company’s software allows information to be constantly updated across different computers, and is used in corporate databases (the name has nothing to do with dancing and in fact stands for Wireless Network Distributed Computing).
Richards played the salesman while Aahlad provided the science. The company was headquartered in Richards’ hometown of Sheffield with a twin office in Silicon Valley. Investors snapped up shares of the company when it listed in London in 2012, enticed by the promise that it offered them a slice of the “Big Data” revolution, one of the tech industry’s buzzwords at the time.
As the company signed up customers such as British Gas, shares soared to value it at £300m. Richards splashed out, building a reported £2.4m home in the shadow of California’s Mt Diablo east of San Francisco, with a private community golf course and its own vineyard that reviewers said produced a respectable bottle of red. He also agreed a one-season sponsorship deal with his beloved Sheffield Wednesday.
However, investor enthusiasm waned as Wandisco racked up losses and repeatedly returned to the City for funds. In 2016, Richards was unceremoniously ousted by his chairman, the former Sage chief executive Paul Walker.
Walker, a City veteran, had warned Richards to temper his excessive optimism and urged him to be more realistic about the company’s prospects. Eventually, he ambushed the jetlagged Richards at a breakfast at the five-star Halkin Hotel in London and forced him to sign a resignation letter.
But within a week, Richards was back at the helm, rallying the company’s US investors who threatened to force a shareholder vote on his reinstatement. Walker caved, resigning as Richards came back.
Despite the apparent vote of confidence from US investors, Wandisco shares fell by a fifth the day Richards was reinstated. He called Walker the type of “f---wit” responsible for Britain’s lack of big technology companies and accused the departing chairman of “cloak and dagger” tactics.
Richards had consolidated power and soon began putting the pieces in place for a US listing. He hired Erik Miller, a Silicon Valley executive, as Wandisco’s new chief financial officer and revealed the company was exploring a move to Wall Street. Richards signed sales deals with the likes of IBM and Dell that it hoped would re-establish investor confidence.
An increased focus on sales deals with big US IT giants led Wandisco’s share price to surge once again, but the business still struggled for profits. Plans for the prized US listing were put on hold after another share price slump in 2018.
Richards has increasingly promoted his philanthropy in recent years. He and his wife Jane set up a family foundation in 2018 focused on children's education – Richards has lamented the lack of technical skills in Britain – and, unusually, beekeeping. Trustees on the foundation include Lord Kerslake, the former head of the civil service and an adviser to Jeremy Corbyn during his Labour leadership.
Richards left his California home during the pandemic and returned to Sheffield. Soon after, the company’s fortunes took a seemingly miraculous turn for the better, as it announced new deal after new deal. The company almost never gave the name of the customer, preferring phrases such as “a world leading personal computer vendor” or “a top 10 global communications company”, but it did not seem to matter.
Wandisco said in January that it had signed $127m worth of deals in 2022, a remarkable tenfold increase on the year before, and said unaudited revenues were $24m, triple the prior year.
If this turnaround after years of choppy trading seemed unusual, investors did not mind. The company’s value soared again, and Richards dusted off plans to list in New York, holding talks with Wall Street banks.
That plan is almost certainly dead for the foreseeable future. The revelation that the majority of the company’s 2022 revenue was seemingly non-existent would have sent shares crashing, were they not suspended.
The accounting of software deals is often amorphous. Contracts can be signed without money changing hands, with customers only paying when they start using a service. This can be an accounting nightmare – or an opportunity for commission-incentivised salespeople.
“It's surprising how easy it is at a software company, because you're not trading assets, you're trading intellectual property,” says one executive. “It's really hard to track anything down and it’s impossible to audit.”
Wandisco is hardly the first British software company to face such questions about its finances. The former FTSE 100 company Autonomy was often dogged by City concerns about accounting before it was sold to Hewlett Packard. Those allegations have led to US charges against Autonomy founder Mike Lynch, who will challenge his extradition in court next week.
Wandisco is now investigating how far the potential fraud went. Even if a single employee was responsible, investors are likely to ask how they could have operated with such freedom. Answers are unlikely to be quick: shareholders’ phone calls on Thursday morning were going directly to voicemail.
