Note: This article first appeared on www.sba.gov, by Tim Berry,
Guest Blogger, on 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.
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