Are you considering making an investment in a start-up, an early stage
company, or even a franchise? We would recommend you follow these nine
steps to avoid becoming a victim:
1. Understand the business plan:
You need to understand the business. If you don’t understand it, should
you be investing in it? Before you think about writing a check, ask:
What is the company going to do with your money?
Does the company have enough cash to operate?
What does the company sell?
Who is going to buy?
Who is competing in this market?
How does the company make money?
When do you get to see some profits?
If the company succeeds, when do you get to sell your equity?
The business plan should make sense to you. If it doesn’t make sense,
don’t assume that you’re not smart enough to “get it.”
2. Don’t get stampeded into investing before you’re ready.
Promoters/Franchisors of legitimate ventures will encourage you to take
your time, consult your lawyer, and ask questions. They should want to
have a perceptive, sophisticated investors as part of their circle.
Invest when you’re ready and not a moment before.
3. Seek out other investors/franchisees.
Ask the promoter/franchisor for other investor/franchisee contact
information.
Here are just a few questions to get you started:
How do you know the promoter/franchisor?
What can they tell you about the business?
When did they invest?
What about this company convinced them to invest?
If the promoter/franchisor won’t let you talk to other
investors/franchisees, or if the other investors/franchisees seem
sketchy, be wary!
4. Ask common-sense questions.
When a promoter/franchisor tells you about the awesome returns his
venture is going to earn, ask some common-sense questions:
Why haven’t 100 other companies rushed into this market?
Why haven’t the big private equity firms snapped up this deal?
Why doesn’t the promoter simply borrow the needed funds from a bank?
5. Don’t get shamed into investing.
It is human nature to crave the admiration and approval of others. Scam
artists prey upon basic human nature. Always remember, when someone
wants your money, you get to ask any questions you want. If you get the
sense that the promoter/franchisor is trying to make you feel stupid for
asking questions, you’re probably about to get scammed.
6. Resist the “Fear of Missing Out.”
Scammers prey upon this fear. They’ll convince you that this is a “once
in a lifetime” chance to get rich. Most scams, in retrospect, are
painfully obvious. Scams work because they cause your brain to shut off
for just long enough to write a check.
7. Meet the promoter/franchisor in person.
Talk to him and find out what his story is. Have him tell you about
himself. Does the story make sense? Does he know the kinds of things
that a person with his background ought to know? Do you get a good vibe?
Do you trust him? This is not 100% fool proof because scammers are
quite persuasive. However, if you use a meeting to tease out a lot of
biographical information, it will put you in a position to go back, do
some more diligence, and see if the guy checks out.
8. Engage a smart business lawyer.
If you’re going to invest a meaningful amount of money, paying for a few
hours of a lawyer’s time can save you from a very expensive mistake. You
want a lawyer who has seen a lot of deals, who has the capability to
investigate the promoter and make inquiries into his background and
reputation, and who knows how to spot a scam.
