Time after time I am amazed, when I need to rescue a client from a high-tech scam, to discover that intelligent, highly-sophisticated and experienced investors could not tell that a deal that had all the hallmarks of a scam was, in all probability a fraud. Sometimes it looks like the investor has shut out all warning signs on purpose and jumped into the project without bothering to do minimal due diligence. I have seen people devoting more thought, time and effort to checking a restaurant bill, than they did checking out a start-up company before investing a million dollars. That got me thinking. The following are some observations on the reasons for such bizarre behavior.
Grab It While You Can
Virtually all successful scams come dressed up in urgency. The primary goal of the scammer is to make sure that you won’t have the time to reflect, consult and check. And since you, the investor, know that to make a huge profit you need to take risks, you decide to take the plunge. The unacceptable alternative is to let the deal slip away.
A good con man will often play on the fear of the victim, that he is about to miss the deal because others are going to invest on a “first come, first served” basis. My advice is never to put your money in a scheme that doesn’t give you the time to review it.
Playing on Our Vanity
We all like to be special. So the other (non-existent) investor “you are told” is begging the entrepreneur to take his money, but he prefers that you invest, because having you on the board of directors is such a treat, while the other guy is just putting in “stupid money.” This is such a sophisticated project, he will tell you, that we need everybody involved to be the top of the top. That suits you to a tee, of course.
He Is Invested Too
To increase your confidence, the scammer will tell you how much he himself has invested in the project. In many cases he has actually invested some time and money (whether his own or other people’s) before realizing that the project was hopeless, which makes it easier for him to win your confidence. One of the warning signs that the project may not be legitimate is if the entrepreneur wants to “recoup some of his investment” from the money you are supposed to invest. If you are dealing with an early-stage project this may simply be a way to pocket some of your money.
Prospects of Huge Profits
In order to make you lose sight of common sense, the project must promise unimaginable returns. The scammer will show you a business plan that proves that it is almost inevitable that you'll make billions out of the investment. True, there is always a chance of failure (he will tell you “honestly,” thereby increasing his credibility and making sure that he won’t be blamed for not including this caveat in his offer), but it is obviously infinitesimal and anyway, as a seasoned businessman, you understand that to make a fortune one must take some risks.
How to Avoid Being Scammed?
A complete due diligence process may be complex and will take time, but a serious one should be carried out whenever possible. However, if what you need is a quick assessment of how risky the project is, you should do at least two things:
1. Have a technical expert take a look at the scientific background. Common scams often involve perpetuum mobile or other scientifically impossible results, such as engines that run on water or plant extracts that can supply electricity to a whole city for a week. A serious expert will spot those in a second. Even with more elaborate and less evident fibs, an expert is likely to sense that something is wrong, although pinpointing the problems may require more time.
2. Have a patent attorney review the Intellectual Property (IP) connected with the project. A real technological project must generate some new and patentable invention. An expert patent attorney will be able to review the IP assets of the project and determine whether there is something real in them. When an entrepreneur evades the questions of a patent attorney, for instance, this is almost always a sign that there is nothing to the project but the façade of an invention.
The first and most important step, however, is for you to realize that you are not the right person to judge a once-in-a-lifetime project that has been proposed to you. Delegating the job to professionals, who are not in any way emotionally involved with the project, may save you much aggravation and money.
Kfir Luzzatto was born and raised in Italy, and moved to Israel as a teenager. Luzzatto has a PhD in chemical engineering and works as a patent attorney. He lives in Omer, Israel, with his full-time partner, Esther, and their four children. Luzzatto has published extensively in the professional realm. For almost four years, he wrote a weekly column in Globes (Israel’s financial newspaper). He is also the author of the new novel, ExtraLife, Inc. For more information please visit KfirLuzzatto.com
*Image of “surprised man“ via Shutterstock
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