Midjourney - the portrait of twoface, the enemy of batman Matters2

VENTUREMANIA: WHEN CONSULTANTS PRETEND TO BE INVESTORS

DRESS LIKE THEM, ACT LIKE THEM

Question: If you come across a company using words such as “venture” or “capital” in their name, what do you assume their primary activity is? – One would usually assume they are investors, right?

Most of the time this is the case, but we come across an increasing number of consultants and advisors who have incorporated such words into their name. Occasionally, some of our clients come across these companies too and we have to explain that these are consultants (like ourselves) that will eventually request a fee or compensation.

While everyone deserves payment for their services, not being transparent with their role in the investment process and fee structure only serves to muddy the waters, damage the market, and potentially lead to fraud.

THE STARTUP FEVER

We personally know some of these players, and not all of them have bad intentions. In fact, most of them are true startup enthusiasts who want to contribute to the field in any way possible. Lacking significant capital or investment experience, they cannot directly invest and they instead focus on providing services to aspiring entrepreneurs and innovators. That’s commendable, but wanting to be an investor doesn’t make you one, and the fake-it-till-you-make-it recipe is called fraud.

INVESTMENT SCAMS

This becomes even more of a problem as investment scams are becoming more prevalent in this sector. We have witnessed some of these schemes firsthand and have shared our experiences in our blog section HORROR STORIES.

Initially, we encountered a crude attempt at impersonating an investor. In our article “The Abu Dhabi Investment Scam” we likened this scheme to the notorious Nigerian Prince scam. The perpetrators were so unrefined that even the most basic questions were met with nonsensical answers that only the most unprepared victims would believe. Unfortunately, more sophisticated fraudsters have emerged, setting up institutional websites and LinkedIn profiles with multiple fake accounts claiming to work for fictitious entities located in some of the wealthiest markets. They have become adept at deceiving people.

Midjourney - the portrait of twoface, the enemy of batman Matters2

Picture by Midjourney

RULE NUMBER 1

Nevertheless, it is relatively easy to avoid these scams: do not wire any upfront payment for an investment that you have not yet received. Does this imply that you should not engage consultants and advisors? Sure you can (and sometimes should), but you should have a clear understanding of what you will receive in return.

If you are paying for specific services (e.g. sell-side due diligence, deck preparation, data room set up, etc.) this falls into a normal transaction, with a service provider and a client that agree on specific services. Additionally, a success fee is normally in place, to align the interests of both sides and to make the retained services less expensive in the short term.

We advise not to pay for undefined services, such as access to a network of investors or other vague proposals: promising substantial sums with a small initial cost is a simple way to make a quick buck; most of the time you will not see any result, and you will have nothing to show for the money you have spent.

THE BOTTOM LINE

Why is it reprehensible to use words such as “Ventures” or “Capital” when one is not an investor? Because the company/person implicitly promises something that they cannot guarantee. They are not a venture capitalist or an investor, and they won’t be the one deciding to invest. They might be knowledgeable and have a great network, but promising investments and (eventually) asking for an upfront payment is borderline fraudulent. By doing so, they are not aiding the ecosystem in combating the fraud plague; they are, in fact, making it worse.

Avoid working with companies that use such snake-oil sales tactics, which only degrade their reputation and our profession as consultants. While they undoubtedly have a lot to contribute to this sector, they should just stop pretending to be an investor and embrace the rich and rewarding role of a consultant/advisor convincing clients of their experience and knowledge in other ways.

"DO YOU HAVE INVESTORS FOR OUR COMPANY?"

We get asked this question over and over again… We are very direct and our answer is a strong “we don’t have anything: we don’t own investors”. And we then explain that, in most cases, the industry doesn’t work like this.

For us it’s important to make it clear from day one: Fundraising is driven by the founders themselves, they will have to do most of the legwork.

Consultants, advisors (and previous investors/shareholders) might have a good network, and help with some introductions, but the vast majority of the fundraising effort is on the shoulders of the founders themselves. They must knock on numerous doors, and merely paying a retainer in the hope that someone else will do the heavy lifting is not going to work. You’ll just be flushing money down the toilet.

We at Matters2 know that and our services are built around this idea. We help entrepreneurs with everything around the fundraise,  freeing up their time to focus on the most challenging part: finding and networking with the right investors.

Midjourney - the portrait of twoface, the enemy of batman Matters2

Picture by Midjourney

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