| In E-Biz |

Resume puffery holds dire consequences
July 29, 2000
by Jeff St. John
                    
How does an executive recruiter know that his bright-eyed CEO candidate really earned that MBA from the Wharton School of Business? How can venture capitalists be sure that the visionary startup founder promising to double their investment in a year hasn't served jail time for making similar, bogus promises in the past? 

Welcome to employee background checks -- they're not just for the rank and file anymore. 

Venture capitalists and executive recruiters know that their reputations depend on funding and finding the best business leaders out there, which means performing the proper due diligence on candidates' backgrounds and accomplishments. But given some recent examples of less-than-honest CEOs leading companies with high-profile investors to financial collapse -- companies Digital Entertainment Network Inc. and Pixelon come to mind -- it appears that VCs need a little help from the professionals. 

That's what brought Barry Nadell, president and CEO of InfoLink Screening Services Inc., to a July 18 meeting of the Los Angeles Venture Association. One of the topics discussed at the meeting, Nadell said, was the importance of doing background checks on potential portfolio companies' executives and management teams. 

Nadell has been in the background-checking business for 12 years now, and his Encino, Calif.-based company serves clients such as Webvan (WBVN), Global Crossing (GBLX), and The Los Angeles Times. But he said that it is only in the past six months that venture capital firms have started calling for his services. 

VCs are finally "recognizing the need to do this," Nadell said. InfoLink's business has increased 170 percent this year compared with last year, he said. A significant portion of its new business come from venture capital firms and other clients seeking background checks on candidates for executive positions. 

For $24.80, InfoLink will check a subject's criminal history in one county, verify his social security number, run a motor vehicle report and verify that all claims of prior employment are correct. For less than $200, Nadell said, InfoLink will run a more thorough criminal record check, along with verification of educational background and expanded reference checks. 

Kroll Background America, a subsidiary of international security firm Kroll & Associates, offers a pricier background check. For $1,000 to $5,000, the company provides a report on a business entity and its entire management team going back 10 years. The report includes local, state and federal criminal, civil and bankruptcy checks, independent verification of each executive's education and employment history, and a periodical's search. 

The company also offer a cheaper, less thorough credential verification service for $100-$300. Both companies take approximately 10 days to complete a background check. 

Michael Rosen, senior VP and general counsel of Kroll Background America in Nashville, Tenn., said his company's business has "taken off like wildfire" since he founded it two years ago, with a 70 percent increase in revenue for this year compared with the last. What's more, venture capital firms and law firms now make up the majority of the company's business, he said, and executive search consultants are using the service more and more. 

Basic fact-checking like these firms offer is the "bare minimum" for venture capital firms, said Michael Quigley, managing director of Idealab Capital Partners in Los Angeles. 

"It's necessary, but insufficient," said Quigley, who considers true due diligence the subjective task of weighing an entrepreneur's business experience and personality and forming a composite" view of his ability to work in a team setting. In this light, "It would be hard to forgive someone for not having verified whether a CEO's resume is factually correct," Quigley said. 

So why are venture capital firms going to companies like InfoLink Screening Services and Kroll Background America? According to Timothy Smith, managing director of Stanton Chase Venture Resources in Los Angeles, the problem boils down to time. 

"Prior to the recent slowdown in the capital markets," Smith said, "the pace of investment was so rapid that many financiers didn't have the 'bandwidth' to go through due diligence." He said that his firm has alliances with a number of companies that provide background-checking services.