Did Sequoia India do enough due diligence on Telio?

A nearly two-year legal dispute between Sy Phong Bui, the CEO of promising Vietnamese startup Telio, and his former company ended recently in a verdict against him.

Sy Phong Bui, Telio’s founder and CEO / Image credit: Tech in Asia file photo, edited by Timmy Loen

On June 16, the Singapore High Court ordered Bui to award his shares in Telio, a business-to-business ecommerce marketplace, to the investors of his previous fintech startup, OnOnPay (OOPA).

See also: Telio founder loses lawsuit, judge finds that he ‘did not act honestly or reasonably’

OOPA’s board had accused Bui of breaching his fiduciary duties as director by usurping the company’s business opportunities and using its resources – including its merchant network, human resources, and intellectual property – to develop his next venture, Telio.

The judgement noted that given the evidence, Bui “did not act honestly or reasonably.” OnOnPay’s investors were also kept in the dark during Telio’s fundraising process.

In 2019, Telio made headlines after receiving US$1.5 million in seed investment from startup accelerator Surge and bagging another US$25 million from Tiger Global Management, Sequoia Capital India, GGV Capital, and RTP Global.

This raises the question: Did investors – Surge in particular – do enough due diligence on Telio and Bui?

The founders are really what you’re investing in.

Several venture capitalists in the region tell Tech in Asia that potential backers should talk to former investors to address potential risks involving intellectual property (IP) and the capitalization table when a founder spins off an idea from their previous venture.

“I would have the founder ask prior investors to sign waivers or have the prior company dissolved before proceeding,” says one of the investors. “We have experienced a spinoff, and [we] required the founder to dissolve the prior company prior to investment.”

But compared to later rounds, due diligence is lighter for seed funding, which was when Surge backed Telio. It also comes down to whether investors want to bear the risk of doing less stringent checks.

Case in point: As part of its strategy, Tiger Global, one of Telio’s prominent backers, is known to rely on other VCs to do the due diligence for its deals.

But on the flipside, legal due diligence for a series investment deal is generally conducted on the startup and not on the founder, according to Joel Shen, a technology lawyer at global law firm Withers. “Events within this case would not have been captured by a typical due diligence exercise,” he observes.