Behind the failure of VC firm Formation Group

“It was a long time coming.” That was the reaction of a former employee of Formation Group, the Silicon Valley venture firm that last week took the highly unusual step of putting its fund into bankruptcy protection.

• And the sentiment was hardly unique, based on conversations with multiple other sources.

Backstory: Formation Group was launched in 2015 by Brian Koo, a scion of the family that founded publicly traded South Korean conglomerate LS Group, following the tumultuous breakup of an earlier VC firm called Formation 8. It raised $354 million for its debut fund and began a disastrous string of investments:

• Formation plugged around $90 million into Eva Automation, a failed audio startup led by former Facebook and YouTube CFO Gideon Yu; who was part of Formation’s founding team but who later had a falling out with Koo. It also put more than $50 million into Yello Mobile, a South Korean fintech that imploded in a rash of litigation.
• One bright spot was an early investment in Indonesian ride-hail giant GoJek, but Koo sold those shares at just a tiny profit so that he could plug more money into…
• HonestBee, a Singapore-based online delivery upstart that Koo believed would become the future of shopping in Southeast Asia. The company would eventually fold, but not before its co-founding CEO was accused of self-dealing and embezzlement, and Koo briefly took over as CEO.

The big problem was that Koo didn’t just put good fund capital after bad into HonestBee. According to multiple sources, he also leveraged the fund without limited partner approval — via a $53 million loan from an affiliate of LS Group.

• It was collateralized by future cash flow from fund distributions. But there were no real fund distributions, so LS Group eventually initiated arbitration proceedings. And, in case you missed this part, that’s members of Brian Koo’s family essentially suing Brian Koo.
• The bankruptcy filings are designed to protect Formation Group both from LS Group, as a creditor, and also from the possibility that the arbitration could prompt litigation from LPs (although it’s unclear what they’d stand to gain financially).
• Koo didn’t respond to a request to speak with Axios, and an attorney for the LS Group affiliate declined comment.

The bottom line: Formation Group is done. The legal wrangling over its remaining scraps is not.