Entrepreneurial Liars and Cheats

Many entrepreneurs are dismayed by the slow pace of due diligence checks by potential investors. How many interviews, how many financial documents and resumes and business plans must they submit before getting a thumbs up or down?

This process might be more understandable if entrepreneurs realize that THERE ARE SO MANY LIARS OUT THERE.

Liars will be outed

1. Consider the process of home sales. Just as in real estate, investing in a company is proceeded by a period of judicious inquiry and inspection, recognized by both parties, ending in a legally binding closing, scheduled weeks in advance. (This is why I never believe an entrepreneur who blithely reports, “I'll be funded by then” without even having a letter of interest (LOI) in hand.
2. The reason for protracted due diligence is because, sadly PEOPLE LIE. As Catholics understand, there are lies of omission and lies of commission. The former is when a home seller neglects to mention a material fact, like a rotted roof. A lie of commission is actually writing or verbalizing a falsehood, like checking the word “no” on a form that lists “do you know about this or that.” Just as a home seller may obfuscate termite or water damage, companies seeking investment may similarly “put lipstick on a pig.” Repeat investors know this, so they endeavor to separate the wheat from the chaff through careful scrutiny. As any on-line dater knows, anyone can sound good, but how do they appear up close?

A sincere and honest entrepreneur may be aided by the following short list of several entrepreneurs who have approached us recently, each with constructed stories which omitted or fabricated information. If you can appreciate how many such people approach investors (and service providers) you can understand the logic behind due diligence of your company.

Following the list are recommendations to help honest entrepreneurs make a strong, initial impression. For additional anecdotes about other bad guys (both entrepreneurs and service providers), see prior articles on this website.

1. A Torontoan advertised on E-Lance for business writers with a finance background, including introductions to investors for his new cosmetic company. His website looks great, and describes a very impressive business/finance/investment background for him. Hmm. Why is he trolling the modest halls of E-Lance for help in a highly specialized securities offering? Well, due to his unusual name, 5 minutes on the web revealed that his securities license has been revoked in Canada, he has been fined a 6 figure amount (which he has not paid, three years later), and that his prior financial firm was expelled from the securities industry, all for breach of fiduciary duty to investors. Entire legal documents outlining his shenanigans are available for a free read. Today, he runs an unlicensed financial consulting firm and is endeavoring to raise investment in the U.S. Does he really think nobody will look him up before investing? I sent him a paragraph describing his banishment from the industry to which he responded, “You just don't get it.”
2. A Chicagoan sought investment for his real estate fund. His company is rather opaque but his copious litigation record isn't. After a protracted court case, including several changes of attorneys and legal mumbo jumbo, an Illinois state court ordered him to pay an ex-partner nearly $800,000 for breach of contract and snarky efforts to rack up legal fees he apparently endeavored to foist onto the other party. When he did not pay up, he was sued again. This time, public documents (also on-line) reveal that he has moved more than $1 mm in assets among companies and relatives, emptied bank accounts to avoid paying the prior fine and has taken out additional loans on which he has defaulted and owes penalties. Surely this guy will end up in jail.
3. A Hawaiian sought funding to buy land on Maui and build a mansion he would sell, perhaps as the beginning of a real estate empire. After that, he planned to run for mayor. However, a bit of digging uncovered his prison record. In addition, notes from an open meeting at which he appealed the denial of a real estate license, indicate that he has not been seeing his psychiatrist and taking his medication as often as he is supposed to, and that various court documents sent to him care of the YMCA in lieu of a home address did not find him.
4. Sometimes people aren't liars and cheats, they are just naïve and pushy time wasters. A young New Yorker wanted to attract investors so he could develop a high-end resort on Antigua. He touted his relationship with political leaders on the island, but his only “proof” was a form letter from the Tourism director thanking him for exploring real estate there. Furthermore, he has no business experience in real estate or finance, and no track record with investors either! Yet, he called us often, apparently “into his cups” demanding that we invite the island's political leaders to the U.S. And that we line up investors for him. We reported his obnoxious behavior to the service provider through whom he had gotten our name and, have enjoy a blissful silence ever since.
5. Another liar was actually a client in London. I still don't understand his game. He promised to pay us up front, and more than we sought, which is obviously so rare that we were alert to something being awry, so we slow boated our services, awaiting that fee. For the next month, he called or wrote every day, sometimes three times a day, with a litany of excuses for why the wire, the credit card, the bank draft, PayPal wasn't transferring our fee, why the contact information he provided for his banker and accountant never reached a real person, and why the confirmation forms we requested never looked like real transaction reports we receive all year long. I was actually so entertained by the number and variety of his excuses that I started taking notes for a future article about types of business lies. However entertaining his calls might have been, they wasted time we could spend on real clients or nail clipping or anything else, so we finally conveyed a “don't call us; we'll call you” sort of message. I still wonder. Was he just lonely? Did he like creating a fictional personality? I guess I'll never know.

   

   Honesty is the best policy

What can an honest entrepreneur deduce from these anecdotes?

• From an investor's point of view, evaluating entrepreneurs is a process of weeding out those companies that are not suitable for one reason or another. The easy first research is to look for red flags like lies, litigation, and customer complaints. Those people get a quick and decisive “no.”  Other legitimate and well meaning companies are just an unsuitable fit. Maybe the investor specializes in a particular business niche or geography or stage of company development. Perhaps he/she is not liquid until an exit event in a prior investment.
• Action steps for entrepreneurs: Before you EVER approach a funding source, spend time on the Internet researching everyone on your management team, their prior company affiliations, and any companies with names similar to yours. I promise, prudent investors will do so. If anyone on your management team has public disclosures of liens, bankruptcies, criminal convictions, litigiousness, investor complaints, securities violations – you are sunk. If another company with a similar name has a bad reputation with investors, you will have an uphill battle on initial calls and may want to change your appellation. If none of you has relevant positive experience... please wait until you do. This is professionals' money you are seeking, not Mom's. Also, investigate the criteria of an investor before launching into a long monologue selling your deal. If the investor specializes in oil and gas equipment and you make marinara sauce, it is not a good fit. Be respectful of their time. Find out early. Maybe ask if he/she knows who does invest in food companies. 
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• From an investor's point of view, it is sometimes difficult to discern whether an entrepreneur's behavior is naïve or obfuscatory. Either one requires additional time. A naïve entrepreneur does not understand the process of financing, may not have appropriate documents organized well, and may have ridiculous notions of value. An honest investor may not want to be a tutor to a neophyte. By contrast, a dishonest (vulture) investor may take advantage. Meanwhile, a purposeful obfuscator is hiding information relevant to a well informed investment decision, which can cause litigation down the road when the investment is rescinded, even after the fact. As you can imagine, there are lots of strong ventures and well prepared managers asking for money, too. So it is easy to pass on questionable entrepreneurs.
• Action step for entrepreneurs: The more you know about how business transactions (including financing) work, the faster you can assess whether you are likely or unlikely to secure investment and whether a purported investor is real or really interested, or a time waster for you. Ignorance is expensive. One woman was ready to pack up her NY state business and move to FL at the behest of an alleged investor. Thank goodness she called us. “Do you have anything in writing from him? Have you called prior companies he says he has invested in?” “Uh... no.” Many a naïve entrepreneur has wasted time shopping for dollars they will never get or has been deluded by complimentary intermediaries who promised a rosy future (in exchange for monthly fees) who knew that the entrepreneurial venture was unfundable. So do some research on bank loans, valuations, investment banking fees, success rates on crowd funding or web posting sites, and get to know SEC and FINRA rules regarding the solicitation of private investment.  Enlist trusted mentors or advisers before approaching investors and intermediaries. This education will save you time and money. By all means, check references or anyone you work with. Don't just read resumes. Make calls. Familiarize yourself with the sorts of logical questions any investor is likely to ask (see other articles on this site). If you fumble a key question, the investor may not know whether you are just ignorant or hiding something. Organize your corporate documents in a professional manner (see other articles on this site or our business site: www.starlightcapital.com where we also offer a $50 workbook which lists every single document of value and explains why). If you do encounter an interested investor, you will be able to respond promptly with relevant documents and then able to ask, a week later, about any questions regarding specific, itemized sections.
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• From an investor's perspective: People who say, “You just don't get it” often have secrets they don't want you to get. This was Enron's response to investigative business journalists, Bethany McLean and Joe Nocera. Guess what, they did get it and exposed it as fraud.
• Action item for entrepreneurs: If you can't explain what your company does, how it makes money or what you will do with investors' funds, no one will trust you. Practice your answers to logical questions that any investor will want to know. (See other articles on this site for details).

I happen to enjoy sniffing out liars and frauds, self-promoters, and bizarrely fictitious self-creations who may be endeavoring to secure money or jobs under false pretenses. 

Often, honest people do not realize how many bad guys are out there. I hope this article outlines how they hinder your business goals even if you don't meet them. I assure you, investors do, all the time.

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