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Swimming in Shark-Infested Waters: Avoiding Entrepreneurial Scams

Swimming in Shark-Infested Waters: Avoiding Entrepreneurial Scams

By Tim Berry, Guest Blogger
Published: February 24, 2015 Updated: February 24, 2015

Are you an entrepreneur looking to get your startup funded? Be careful.

I suppose it’s no surprise that hopeful entrepreneurs are good targets. Too often we’re led to believe that getting investment money is the ultimate victory. Supposedly we’re all going to be successful as soon as some investor says “yes” and we get a big check. And that eagerness to get the money makes us vulnerable to sharks.  

While you’re probably as alert as anybody to scams involving fake Nigerian royalty, or free weekends in resorts, your normal anti-scam radar can malfunction when you’re in startup mode looking to get financed. Keep your eyes open and stay safe.

Write a business plan. Don’t buy one.

Take, for example, the business plan writers who sell their services using the claim that the look and feel of a written plan will get you investment. That’s just not the case. Investors invest in the people, the business and future potential growth. But overpromising on results isn’t necessarily a scam if the business plan writers actually deliver a written plan.

On the other hand, people selling pre-written business plans with claims like “investor-ready business plans” for sale and “just fill in the blanks” know they are lying.  

A lot of general and obvious rules apply. Deals that seem too good to be true are almost always just that – not true.

Real investors write checks ­– not invoices

Yes, it takes money to make money. But that’s about ideas, execution and working capital – not sharks. Beware of consultants, brokers, loans and offshore deals that collect your money as a step towards getting investment. For more detail and a good list, check out Martin Zwilling’s "Shortcuts to Entrepreneur Funding are Usually Scams" on Forbes.com. And Adam Roy of Gaebler Ventures has good related advice in a post called "Recognizing and Avoiding Business Scams." Here are some specifics:

  • Fake investment brokers who contact you saying they represent investors, but require a retainer up front. You pay the money, and whoops, sorry, the investors disappear.
  • Fake investors, often from overseas, interested in investing but only after you pay some fees to cover costs including due diligence.
  • Offers of commercial loans, promising quick approval, but requiring stiff fees for fast processing. Then the lender vanishes.
  • And of course you don’t fall for pyramid schemes, chain letter and other classic get-rich-quick schemes.
  • Beware of businesses that don’t like written contracts and documents.
  • Always check references and don’t settle for references they give you; do a web search and find your own.

Magic formulas, magic information

Be very careful with people selling names and lists for fat fees. For example, lists of commercial lenders, angel investors or venture capital firms are available free for anybody who can do a competent web search. But they are also sold as scams for hundreds of dollars, packaged as if they were magic formulas for easy money.

Turnkey start-your-own-business packages, often bundles of software and information you can use to set yourself up in your own business, are usually too good to be true. For example, you make money from home processing bad debts or insurance claims. But think this through: How many businesses are there that will actually work with software and a how-to binder? Don’t you have to know the business, and have the selling and administrative skills, before that would work?

It’s true that legitimate network marketing companies sometimes require a certain up-front investment for products, kits or educational materials. But the good ones provide money-back guarantees on several levels, and the best ones never promise any get-rich-quick results or disguise the reality of the hard work involved to make it to the top with their companies.

Angel investment pay-to-play

Many legitimate angel investment groups charge a fee for processing and submission to a screening process. For example, the group I’m a member of, Willamette Angels, is right now taking submissions for a May investment of six figures in local startup. We charge $125 to the startups that enter (if you’re a startup in Oregon and interested, here’s a link: Willamette Angel Conference). The fee goes not to us, the angel investors, but to the local chamber of commerce that organizes the event. And startups that submit get at the very least a real review and great feedback from real angel investors, worth a lot more than the submission fee.

On the other hand, you can find startup events that charge thousands of dollars to startups for a chance to pitch to a group of angel investors. And you can find some very vocal critics of these events, who call them a scam. How much is okay to pay? I think paying a hundred dollars or so to a local chamber of commerce is fair, and paying thousands to pitch is probably a bad deal.

Red flags to watch for

Think it through. Of course you should beware of any business that has only an online presence, with no physical address; or any scheme that has you sending money to a list of names; and a work-at-home business that requires upfront investment; or a company with no contact information beyond an email address or telephone number.

The more things change, the more they stay the same

Yes, you have to “spend money to make money”—but no legitimate venture capitalist invests in new businesses through oddball approaches such as phantom funding, “qualifying” you with cash or inviting you to join a long chain letter. What your gut tells you is still valid: even in the exhilarating world of entrepreneurship, if something sounds too good to be true…it probably is.

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .