The Icky Side of Entrepreneurship
Scams, incompetence and apathy, oh my!
I’m just coming off a months-long due-diligence process with a couple of very sophisticated scam artists. Their persistence and convincing acting job has been truly breathtaking – they should get Oscar awards in the “douche-bag” category. But this isn’t the first time and won’t be the last time that I’ve been taken advantage of or scammed without success. Unfortunately, it’s not just about avoiding the scam itself, which is actually pretty easy if the transaction is conducted online and involves transfer of money. It’s also about the time that these thieves literally steal from you to untangle the machination from its apparent legitimacy. And time is money, so avoiding them altogether translates to one more week of runway, or whatever. I sincerely hope this blog post gives you some insight into the rat-invested underbelly of the startup world so that you can avoid these situations altogether, or at very least not be a victim.
I’m going to call all of these “scams” but these are not all scams in the traditional sense of the word, where somebody misrepresents some seemingly legitimate value proposition , like a Ponzi scheme. They all are, however, designed to extract resources from your company with the guise of a shortcut to a goal, or that their advice is somehow better than everybody else’s because it’s 100 times more expensive. I’ve found that these schemes fall into 4 major categories:
2. Incompetence or Hubris
4. Ulterior motives
This type is the easiest to spot but potentially the most dangerous because it exploits a vulnerability that most aspiring entrepreneurs have – Hope. In general, the scam starts with unsolicited interest in your company from an investor that “discovered” your company online and has seen the potential or has a personal interest either due to the nature of the product or likely any other reason for having a connection with what you’re doing. Likely an international man of mystery, this individual has enormous wealth built through years of work in an industry that has nothing to do with what you’re doing (plausible ignorance), but has “people” that tell him it’s an excellent idea. He may do extensive due diligence but is probably in a hurry due to some sort of esoteric time window either due to taxes, other investments or what have you. When I was approached by such a scam artist, the questions went into a lot of detail and took several months of digging ever deeper. In my case they even went as far as to give me the login credentials for a legitimate bank account to show me the investment money in the bank. However, unlike similar types of scams, never during this process was there a request for money or a bank account number – that is, until the very end, once the term sheet had been signed and countersigned. That’s when the venus flytrap closes and the investor requests some “skin in the game” for purchasing a surety bond or some other sort of financial instrument that protects his investment. The details around this financial instrument will remain classified on a need to know basis, which of course you don’t need to know because it is for the investor. The “investor” may point you to a legitimate company that actually underwrites these forms of securities, but the payment will be going to an unaffiliated overseas bank account. At that point, your own due diligence process with come up with nothing but blanks – no references, contact names or numbers, nothing that would give you a paper trail. In my case the bond company cited registration with the UK FCA (Financial Conduct Authority), a legitimate regulatory body for the United Kingdom. A search on the FCA site revealed that the bond company was a “clone” organization and that the cited registration number actually belonged to another company. This is where it became clear to me this was an elaborate scam, convincingly acted by thieves willing to commit 2 or more months of e-mail exchange for a rather paltry $10k.
Luckily, you don’t have to waste two months figuring out the true nature of these scams. Do your due diligence at the very beginning – web site, references, public relations, etc. Ask enough questions about the investor to make sure he is a good fit for your company and make you VERY comfortable that it is legitimate. Under no circumstances should you send money up front to an unaffiliated bank account, real investors do not ever ask for this.
Incompetence or Hubris
These are two sides of the same coin – on the one hand overstating what you do know, and on the other, understating what you don’t know. In either case the contractor has misrepresented himself and the entrepreneur is going to suffer the consequences. As an entrepreneur it is important that you get expert and trusted first-hand outside opinions about the folks you’ll be spending money on. Get resumes and references, non-proprietary information on prior work, make sure the analysis is sound.
This scam stems largely from a general lack of concern regarding the startup “condition” of being broke basically call of the time. If you’ve never been in this state, then how would you know what It’s like? If you are used to doing contract work for Intel, you likely don’t have a lot of empathy for those of us courageous enough to take a leap of faith and place our livelihood on the line to do something truly transformative.
Beware of this “business as usual” attitude among contractors and make sure they understand that razor thin margins and working on the brink are not theoretical for entrepreneurs. Try to find those that understand and have worked in that environment before and hold their feet to the fire. Make sure they understand that they are your customer, not the other way around, and that if they do good work, you will be back, and that reputation in the contract business is very important.
This one is likely the most difficult to spot because even the scammer(s) may not be completely aware. On the nefarious side, the contractor or investor may be trying to gain access to some key IP, or hire away an employee that you have trained. They may also be willing to take your money for promises of a long-term relationship with no intent of extending the engagement beyond when the money runs out. In any case the investor or contractor is looking out for his own best interests and not yours. Keep track of time spent and if the contract is violated, don’t pay! In my case, a supposed marketing expert (highly recommended by the way) was desperate to make his alimony payments and once that was done I never heard from him again. This particular individual also made a very emphatic argument that you needed to spend upwards of $35,000 on any “reasonable” promotional video, and of course that his own production company was the only one qualified to do it. If anybody tells you this, walk away – quickly.
“A fool and his money are soon parted.”
Thomas Tusser (1524-1580), an English poet and farmer
These sorts of misrepresentations can be very, very expensive in time and money. As they say, a fool and his money are soon parted, and I can almost guarantee that at some point in your startup process you will be played for a fool. Don’t bite on these scams! Get expert help where you need it, particularly when the contractor is outside of your wheelhouse, and be very suspicious of anybody that takes your money. Above all, get it in writing and make sure the contract is written to ensure delivery of something of value. Don’t pay in full until you get what is in the contract. Investors have zero tolerance for mediocrity, and you should too.
Founder and CEO, Augmented Sense Technologies