219 - Startup Predators

Startups face the threat of bad actors every bit as much as investors. Investors hold the currency, but startups hold all of the innovation, technology, and long-term value, and that makes both prime targets.

My team recently encountered and handled one bad actor pretending to be an "investor" particularly well, and though I won’t name them directly, I will share the structure of their scam as a warning to others.

The scam amounted to a "grooming" period, where the bad actor offered to deliver twice the funding required, but attempted to bend everything to revolve around them, making their role central to the process. The bad actor then attempts the punchline, to destroy and "rebuild" the company, placing themselves as a 20% equity "founder". These criminals seek out and prey upon the desperate and gullible, and they are the reason why all Startups have to perform due diligence on the people who want to invest in or work with them.

Big Red Flags (BRF) to look for include:

• An "investor" who backs away from investing themselves, but then wants to introduce you to others, while taking either a commission and/or role in your company and/or boards themselves. This is the very last person you want to take advice from or open the gates for.

• Anyone who suggests becoming a "co-founder" in a company that has already been established for years. At first glance, it sounds like they’re just an idiot who doesn’t understand what "co-founder" means, but it actually refers to destroying your company and rebuilding it with them in the center.

• Anyone who wants you to disclose detailed and non-public patent information, but hesitates to sign a simple NDA. These are often individuals seeking to steal patented systems and methods, either for regions where the patents don’t apply, or where they aren’t enforced.

• Anyone who tries to be very secretive about their identity, and turns out not to be famous. This is a tactic to delay due diligence processes, limiting the time available to investigate the individual.

• Anyone promising to rush the investment process such that it is faster than 90% of all investment cycles. This is a typical FOMO tactic, trying to instigate haste so that they can screw over your team.

• Generic advice that an LLM/trashbot could write, neglecting your company's actual details.

It was a proud moment for me when I heard one of my colleagues say that the bad actor became flustered enough to blurt out his nefarious plan to destroy and rebuild the company toward the end of their meeting. Anyone dealing with potential bad actors needs to be so capable.

Getting the right investor will take as long as it takes, but unlike the hasty bad actors, the right investor can help you reach the places worth going.