During the VC diligence process, the management's background is thoroughly assessed to ensure that the money being thrown in will be managed by ...um... good people. Entellium, a Seattle-based CRM company, was sly enough to pass all those background checks and dupe some of the highly respected VC firms, namely Ignition Partners and Sigma Partners. (Story here).
I'm not trying to analyze this case here but rather talk about how entrepreneurs must execute on stewardship and prudence in using someone else's capital. Yes, that's right. Even though they legally "sold" shares to outside investors, they are legally and morally accountable for adding shareholder value. It's really easy to get tricked into thinking that the capital infusion is the cure-all to startups. Yes, cash is the king... only until you realize that 1 + 1 needs to be 11 in the startup environment.
Let's think about the Entellium case here. The founders lied about the revenue and keep taking venture capital. What were they thinking they would end up? First of all, they are going to miss home for a very long time. Secondly, they should've realized that building a capital efficient company is the cornerstone of venture-backed company business model. With all that money pumped in (even if the imaginary revenue is real), the exit just will not be as successful. The venture investors should've also realized that economics of this investment as well. In the venture business, it's all about the multiple here: cash in, cash out. Lastly, and probably the most detrimental one, both founders will never ever have a chance in the startup world. While some rogue investment bankers (wink, wink, UBS dude) do come back to the scene, the venture business really depend on the trust more so than anything else. I just can't say how many times I've seen "A" team with "B" idea gets venture funding. You would think that VC was a dark side. Think again, there aren't any return of Darth Vader in the venture community.
Case in point, there's no point of being voracious for capital. Let it play out and try hard to make stuff happen. Failure is much more valuable than greed for other people's money.