Lessons from Australia’s biggest start-up blowup

The founders had known each other most of their lives. Mito and Durre were childhood friends who’d spent Christmases together, gone to university together, and there met Start. It was the kind of origin story investors love.

Peter Bruce-Clark, a general partner at UK firm Kalytix who joined the board in 2023, had called Mito “what we describe in Silicon Valley as a ‘charismatic entrepreneur’ – he has great business acumen, a solid pitch, knows how to hustle.”

But by March, EVP – the Sydney venture capital firm that led the fundraiser with a $10.4 million cheque – had called the police. Strongroom entered voluntary administration. Two of the co-founders – Mito and Durre – faced allegations of deliberate fraud. No charges were laid. EVP’s legal civil action now names 32 defendants, including earlier investors. Creditors are owed up to $27 million.

Mito’s lawyers have contested the allegations, admitting to financial “discrepancies” but denying fraud. He and Durre were contacted for comment for this story. The matter remains before the courts.

What EVP alleges it discovered, after the money had changed hands, was a chasm between what Strongroom had claimed and what the books showed.

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According to The Australian Financial Review, Strongroom had claimed to be profitable, with $8 million in annual recurring revenue. In reality, the company was allegedly losing $800,000 per month. Debt was understated by more than $4 million. Government grants, loans, and share payments were allegedly booked as customer revenue – inflating the metrics investors relied upon.

At the centre of the collapse was a related-party deal. Strongroom had committed to buying Member Benefits Australia – a loyalty platform owned by Strongroom director Divesh Sanghvi – for $8.8 million (Zhou has since offloaded it). When EVP’s funds arrived, the Financial Review reported, most flowed immediately to Sanghvi and the other MBA shareholders. Sanghvi told the court he’d spent his share on a $2.5 million mortgage, $800,000 in renovations, and up to $400,000 on a car.

Public examinations in November revealed what the Financial Review described as governance chaos. Mito told the court he had never read Strongroom’s board minutes. Record-keeping was “informal at best.”

The gap

For Australia’s VC community, the wreckage has exposed something uncomfortable: a gap between how start-ups present their numbers and how investors verify them.

Luke Rix, founder of KC Ventures – a financial advisory firm that provides due diligence services to VCs – says the problem is fundamental. Founders pitch using metrics such as monthly recurring revenue (MRR) and annual recurring revenue (ARR). But MRR and ARR aren’t accounting standards. They’re storytelling tools.

“VCs like to go deep into MRR and ARR, looking customer by customer,” Rix says. “But what probably doesn’t happen is: how does that marry up with the compliance and financial data in the accounting system? That’s where the gap is. At the end of the day, VCs aren’t accountants. They’re focused on the forward-looking – is this company going to deliver the outsized return they’re looking for?”

The typical timeline from first meeting to investment recommendation is about six weeks for a Series A, Rix says. That’s not unusual. The question is what gets done in that window, and what gets skipped.

Determined fraudsters are hard to stop, Rix acknowledges. But there are practical safeguards that don’t require forensic accounting. “Taking a sample of 20 invoices and tracing each transaction from customer to bank account to accounting file … That doesn’t take enormous time, but it can catch people gaming the system.”

Some VCs now require founders to log into bank accounts live on video calls – a simple check against doctored statements.

The pressure

The pressure to move fast is real, says Maxine Lee, head of investments at seed-stage firm Skalata Ventures. In competitive rounds, there’s pressure to close before someone else does. But there are limits.

“If a process is so compressed that we can’t run the minimum checks we consider non-negotiable, then we’ll probably step aside,” Lee says. “If the expectation is ‘sign this in 72 hours and don’t ask any questions’ – which has happened – that’s simply not a fit for how we invest, no matter how hot the company is.”

Walking away has caused frustration with founders and co-investors, she acknowledges. But it’s part of building the discipline required to manage other people’s money.

Lee says diligence on founders is as important as diligence on the opportunity itself. Skalata conducts back-channel references – speaking to previous investors, colleagues, co-founders – beyond the references founders provide.

“That’s actually raised issues for us in the past where we haven’t proceeded with an investment,” she says.

The Strongroom case hasn’t changed Skalata’s processes, but it’s reinforced why they exist. “It’s heightened awareness on our team about where it can go wrong.”

The game

The Strongroom saga has also pulled back the curtain on something venture capitalists rarely discuss publicly: the unspoken game of start-up fundraising.

“Founders are always trying to project themselves as having more momentum, to build momentum,” says Anish Sinha, co-founder of insurtech startup Upcover and a former Goldman Sachs analyst. “Belief builds on belief. And belief from customers and investors translates to capital, which translates to progress.”

The ways founders project themselves to be bigger than they are, including winning enterprise proof of concepts, media mentions, and marquee hires, don’t compensate for revenue, says Sinha. Instead, it’s “the tip of the iceberg above the water” to attract investor interest.

And unlike public market investors who view risk unfavourably, VCs chase it actively. Risk produces asymmetrical outcomes – the chance of a 100x return. “The best storyteller founders combine today’s reality with tomorrow’s future,” Sinha says. “It’s obviously a tightrope walk.”

But there’s a hard line between storytelling and falsifying metrics. “Numbers don’t lie,” Sinha says. “Building business is a repeat-sum game. Trust and credibility take years to create and only one incident to erase.”

The fallout

Some questioned whether EVP’s decision to call the police – rather than pursue a quieter resolution – was the right thing to do. Could the company have been salvaged?

Lee believes EVP made the right call. “I think the question is less about whether you would call the police, and more about why would you hesitate?” she says. “You’re not at that point talking about a struggling start-up. You’re dealing with potential criminal conduct.”

No charges were laid against Strongroom or any of its founders or directors following EVP’s call to the police.

EVP has continued to operate, and the firm says it has retained strong support from its investors for how it handled the situation. Some recovery of funds has occurred, though litigation continues.

Rix says the ripples are already being felt across the ecosystem. “There’s a far bigger focus now on compliance – how are we validating the numbers founders present? The unfortunate thing is 99 per cent of founders doing the right thing now face added scrutiny. But it could be a good thing. There’s going to be more focus on ensuring books are squeaky clean.”

At Zhou’s Strongroom, the focus is forward. He decided against rebranding: the name is tarnished in investor and media circles, he acknowledges, but strong with pharmacy customers. “Ultimately, it’s the customers that matter.”

Strongroom co-founder Start says Zhou “took a big risk on us”, bringing across what remained of the team.

“He has been great to work with and we are just focusing on repairing the brand and delivering the same high-quality products as always. I have nothing to do with the old Strongroom AI entity any more. I’m completely under the new entity with Joe.”

The first three months were hard work, Zhou says. “But the company is probably as healthy as it’s ever been in the past few years. We’ve got through the hardest period, and we’ve got some cool stuff coming up.“

What comes next

Anthony Woodward, the chief executive of Australian data governance scale-up RecordPoint, warns the implications extend beyond venture capital. “AI is accelerating the pace of business. Start-ups are building products, scaling users, and spinning off faster than ever before,” he says. “It speaks to the broader due diligence and data validity challenges faced by everyone in tech.”

“The Strongroom case may be the first of this kind of incident. But unless the industry stays vigilant, it won’t be the last.”

Sinha, for his part, is philosophical about the dynamics that allowed Strongroom to raise $17 million in the first place. “I think it’s a stretch to assume founders will not be wildly optimistic in their storytelling about their ability to out-execute on the risk. That’s the job. And it’s naive to assume VCs won’t have fears of missing out on hot deals.

“Unfortunately, that’s just the way the game is played.”

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