A Billion Here, A Billion There
The world is inhabited with a number of individuals that can sell ice to Eskimo’s. The investment community is also populated by a number of individuals who try to sell dreams to investors that may not make economic sense, but the salesperson is so personable that the investors gets caught up in the dreams of future and ignore basic due diligence questions.
Example 1 – Doug Vaughn
Recently in New Mexico, we had a firsthand example of investors ignoring basic due diligence in the form of the notes sold by Doug Vaughn. The New Mexico Angels were approached by an individual that suggested we look at the Vaughn notes. We asked two simple due diligence questions:
1. Show us the financials that prove you can buy the high interest rates imbedded in the notes
2. Show us the collateral that backs the notes.
Needless to say, we got no answer. END OF CONVERSATION.
Example 2 – A Sketchy Company
Later, the New Mexico Angels were approached by an individual that suggested he had over a billion dollars of capital to deploy and he was looking for people to help in his efforts. After a bit of due diligence, including a review of the company website and a court records search, a number issues were brought to light. The website was cluttered with videos of the company’s president and his staff talking about how successful their past companies were and how much money they made. However, court records showed a number of lawsuits over various failed business ventures past and current.
Armed with information and being pressed by the individual representing the company a meeting was scheduled. After introductions, the pitch was made:
SKETCHY CO: “Our investment organization has a over a billion dollars of capital to deploy, we have done over 3,000 funding transaction over the last couple of years, I personally have made a number angel investments in the last couple of years, and we want to work with you to help people.”
NMA: “Pardon our skepticism, but we have never heard of you and if you have a billion dollars of capital we think we would have?”
SKETCHY CO: “We are real just go to our website.”
NMA: “How do you do a deal?”
SKETCHY CO: “We work with the company looking for financing, take an application and send it to our underwriters.”
NMA: “Who are the underwriters?”
SKETCHY CO: “They are internal underwriters?”
NMA: “Do they have names and can we call them?”
SKETCHY CO: “No our organization does not provide the names of the underwriters.”
NMA: “Can you provide names and references of companies that you have funded?
SKETCHY CO: “Sure, I will get them to you.”
NMA: “We need names, addresses, and telephone numbers.”
SKETCHY CO: “Oh, no our organization does not provide these names.”
NMA: “Okay, so you say you are an angel investor, can you provide companies that you have personally funded?”
SKETCHY CO: “No, I really don’t want to provide that information.”
NMA: “Well, send us the requested information if you want us to work together, if not thank you for your time.”
END OF MEETING. Never heard from him again.
As Angel investors, we have the opportunity to see a number of interesting deals, both legitimate and not. Basic due diligence questions are important before you engage in a potential investment. Be sure to ask a company:
- To provide references
- To provide a business model showing how they will be viable
- To provide references of people who have financed the business thus far, as well as their contact information.
- To provide updated financials; Profit/Loss and Balance Sheets
- Then do your own research!
- Investigate their website for legitimacy
- Search the company and its leaders on the New Mexico Courts website to see if there are any lawsuits or criminal actions against them
If you are satisfied with the answers you received during the due diligence process, then start the conversation about making an investment, keeping in mind the following items of concern:
- Time Sensitive Deal: Someone looking for investors and needs to money today, and the deal will close if you don’t put money. Stay away, do your due diligence.
- Entrepreneurs that sell their stake in the company, but the money goes to them, not company.
- Entrepreneurs that talk about their investment philosophy on the internet promoting how great they are doing, but have no examples in real life.