VerSe Innovation, the parent company of DailyHunt and Josh, is facing allegations of participating in a "round-tripping" scheme with AI startup Builder.ai, which is reportedly on the brink of bankruptcy. The accusations, detailed in a Bloomberg report and other sources, suggest that the two companies engaged in reciprocal billing practices between 2021 and 2024 to inflate Builder.ai's revenue figures, potentially misleading investors.
The alleged scheme, known as "round-tripping," involves companies billing each other for similar amounts, creating the illusion of legitimate revenue without any real exchange of goods or services. Documents reportedly show nearly $60 million in reciprocal payments between Builder.ai and VerSe Innovation (including its subsidiary Quark Media Tech) for services like app development and marketing. These payments were allegedly timed and staggered to avoid detection, but ultimately offset each other in total value, a classic indicator of round-tripping.
According to sources familiar with the matter, many of these transactions did not involve the actual delivery of services or products. This artificial inflation of revenue allegedly allowed Builder.ai to present a more attractive financial picture to investors during fundraising rounds. Last month, Builder.ai stated it would file for bankruptcy after Viola Credit, a key lender, seized $37 million from its accounts. Furthermore, reports suggest Builder.ai overstated its projected 2024 sales to creditors by 300%, leading to increased scrutiny and the freezing of its funds. US prosecutors have reportedly issued a subpoena demanding detailed financial records and customer information from the company.
VerSe Innovation has vehemently denied any wrongdoing. Co-founder Umang Bedi stated that the claims that VerSe documented expenses or billed for services it didn't receive or provide are "absolutely baseless and false." He asserted that VerSe operates with transparency and adheres to strict financial regulations, emphasizing that the company is "not in the business of inflating revenues."
The allegations against Builder.ai and VerSe Innovation raise serious concerns about financial ethics and regulatory oversight within the startup ecosystem. For Builder.ai, the scandal adds to its existing woes, including a recent bankruptcy filing and the seizure of funds by lenders. A Deloitte report also found that Builder.ai lacked adequate internal controls across multiple areas, including supplier payments, revenue recognition, and digital asset management.
The controversy also casts a shadow on VerSe Innovation, although it maintains its innocence. Of note, in its FY24 audit, Deloitte issued an unqualified opinion on the financial statements of VerSe, but delivered an adverse opinion on internal controls. This situation comes as VerSe Innovation has been making efforts to streamline operations, including a recent layoff of 350 employees as part of a push to focus more on AI and reduce costs. They had previously laid off 150 employees in 2021.
If proven true, the "round-tripping" allegations could have severe legal, financial, and reputational consequences for both Builder.ai and VerSe Innovation. The situation highlights the importance of due diligence and ethical conduct in the tech industry, as well as the need for robust internal controls and regulatory oversight to prevent financial malpractices.
