Builder.ai, the AI startup that recently announced its plans to file for bankruptcy, is facing serious allegations of faking business transactions with the Indian social media company VerSe Innovation to inflate its sales figures. According to documents reviewed by Bloomberg and individuals with direct knowledge of the situation, the two companies routinely billed each other roughly the same amounts between 2021 and 2024. This practice, known as "round-tripping," was allegedly used by Builder.ai to boost its revenue figures presented to investors.

The alleged scheme involved the exchange of invoices between Builder.ai and VerSe for services like application development and marketing, with approximately $60 million in reciprocal payments being made over the four-year period. However, in many instances, these services were never actually provided, according to sources familiar with the matter. The timing and amounts of the invoices were seemingly interspersed to avoid suspicion, but ultimately, each firm spent roughly the same amount.

VerSe Innovation has vehemently denied these allegations. Umang Bedi, a co-founder of VerSe, stated that it was "absolutely baseless and false" to suggest that his company recorded expenses or billed for services it didn't receive or provide. He added that VerSe is "not the kind of company that is in the business of inflating revenues." Meanwhile, Builder.ai has declined to comment on the situation.

The accusations have triggered investigations, with US prosecutors reportedly issuing a subpoena demanding detailed financial records and customer information from Builder.ai. The company's financial practices have come under increased scrutiny after it overstated its projected 2024 sales to creditors by 300%, leading to the freezing of its funds and ultimately, its decision to file for bankruptcy.

Builder.ai's downfall is particularly noteworthy as it was once valued at approximately $1.5 billion and had raised over $450 million from investors, including prominent names like Insight Partners, the Qatar Investment Authority (QIA), and Microsoft Corp. Its collapse underscores the risks associated with the rapid investment in AI startups, as investors rush to find the next OpenAI or Anthropic.

The situation is further complicated by reports of internal control deficiencies within Builder.ai. A Deloitte report allegedly found inadequate controls across various areas, including supplier payments, revenue recognition, and digital asset management. Weak IT system access controls and missing audit trails were also flagged.

The implications of these allegations for both Builder.ai and VerSe Innovation could be far-reaching, with potential legal, financial, and reputational consequences. The accusations have already sent shockwaves through the tech industry, raising concerns among investors and regulators about corporate governance and ethical conduct within the startup ecosystem. The case also highlights the importance of due diligence and robust internal controls in preventing fraudulent financial practices.