Some aspiring entrepreneurs are so desperate for funding, or naïve, that they ignore the obvious signs of scams and rip-offs on the Internet, praying for a windfall. One would think that with all the sad stories and tools published over the past twenty years, this problem would be behind us. But people are still begging for more technology or laws, often to protect them from themselves.
As examples, I present my list of ten of the most common ways entrepreneurs can be victimized by ignorance or greed, based on questions and stories I get from entrepreneurs and associates. Most of these are easy to avoid if you do your homework up front, but can cost you dearly if you get sucked in. Use the common sense suggestions to avoid the pain:
- Decoy investor scam. Here, someone who is not a registered financial broker contacts you on the Internet, tells you about all the people they know with money, then turns around to ask for a “retainer” or fee to cover their time and efforts. No real investor or venture capital firm asks for money from the company they are intending to invest in.
- Off-shore unsolicited investor offers. Unsolicited foreign investors that contact you on the Internet need extra scrutiny. If you feel confused by conflicting time zones, differing currencies, and up-front costs, it’s time to run the other way. The SEC and local law enforcement agencies can’t help you much with foreign scams.
- Deposit required to hold your terms. In this scam, you are offered a very attractive term sheet due to close in 90 days or so, with a deposit required to hold your position while due diligence is being conducted. Don’t count on ever passing due diligence, or even getting that deposit back. Professional investors don’t work this way.
- Loan offer in lieu of investment. Watch out for unsolicited loan offers via the phone or Internet that seem to offer quick approval, but require mandatory “premium fees” or “processing fees” up front, payable by money order or electronic transfer. Even if you pay the fees, you probably won’t see the money and won’t find the lender.
- Phantom fund investors. These solicitations, usually via the Internet, claim to represent a large fund that they can’t disclose, until you have been “qualified” for the investment. They promise to provide all the info at the time of close, after you sign a non-disclosure agreement. The close will never happen, but you will be stuck with large services fees.
- Pump and dump stock schemes. Don’t fall for claims from “insiders” who offer stock that you can turn around quickly. It’s usually stock that has been artificially pumped up by their big buy, who take their gain when you buy, and leave you with a big loss on their dump. A variation is “short and distort”, where their profit comes from short selling.
- Work at home to fund your startup. Beware of any offer that asks you to spend money before you can make money, to buy a starter kit, education, or tools. For more details, see a whole article I wrote earlier on this subject. Ignore these.
- Cash transfer assistance funding. I continue to be amazed that some government agency reportedly still gets 100 calls per day from victims of the Nigerian unclaimed cash scam alone. People who fall for this one must be really greedy. The best answer is the age-old wisdom that if it sounds too good to be true, it’s not true. Delete the message.
- Chain emails leading to a windfall. This is the classic pyramid scheme where you get an email with a list of names, asked to send a few dollars to the person at the top of the list, add your own name, and forward the updated list to a number of other people, resulting in a huge return to you. You risk being charged with fraud if you participate.
- Won the lottery. How can you win a lottery you never entered, usually in another country? A simple inquiry or response to one of these emails will get you permanently tagged as a prime scam candidate, meaning a flood of new deals. Delete these quickly.
Beyond the cases mentioned here, if the message or approach sounds suspicious, I recommend you visit Snopes.com, a website detailing thousands of known scams and hoaxes. With this website, and about 75 others like it, I find it hard to believe that user naïveté is the problem.
If people could get past their greed, hubris, sense of entitlement, and use common sense on the Internet, these problems would fade away due to lack of return. I’d rather see your entrepreneur resources focused on real opportunities to improve the world we live in.
This article was originally published by Startup Professionals
Published: October 1, 2013
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