April 27, 2006

“Warning Signs”

To prevent thieves from entering your house you take the necessary precautions. You lock doors and windows. When you go on vacation you leave a few lights on. You may even have a neighbor pick up your newspaper and mail so it appears that someone is home. All of these things are done to deter thieves so your house and possessions remain secure. Similarly, as an investor, there are precautions that should be followed when trying making a deal.

FundingUniverse.com is committed to providing a safe environment for investors and entrepreneurs. FundingUniverse.com will soon be available for use by only angels and angel groups that complete a detailed application process that includes interviews and signed documents confirming the legitimacy and intentions of each individual or group. In addition, we will continue to accept referrals from our already-approved members.

There are some things you need to look for before making a deal with an entrepreneur. The following tips should be helpful to new investors and will provide a review for more experienced investors. (Keep in mind that these tips are merely guides to help reveal red flags. There is a possibility that legitimate entrepreneurs may or may not follow some of these practices.)

Meet Face-to-Face

Meeting a potential entrepreneur face-to-face is critical. If you are about to invest several hundreds of thousands of dollars into a business idea, the entrepreneur should be eager to meet with you.

Complete Background Checks

Investors should obtain as much information about the entrepreneur as possible. Talking with the management team, acquaintances and the entrepreneur’s former employers can provide much needed information. Do whatever you need to do to feel completely confident about the entrepreneur’s credentials.

Beware of “guaranteed returns”

No business idea can guarantee returns. If an entrepreneur claims they can guarantee large profits without risk, then the deal should be critically analyzed. If the possibility for great returns exists, there is an equal possibility for significant loss.

Ensure Every Investment Deal in Writing

If an entrepreneur is legitimate they will not hesitate to put the terms of a deal in writing. Do not let lack of time or money serve as excuse to avoid written deals.

Don’t be Pressured to Move Quickly

Rarely are “once-in-a-lifetime” deals truly what they claim to be. You need to feel completely satisfied with your investments. This type of satisfaction rarely comes from making quick judgments about a business venture.

The brief list provided here is by no means complete. For further information on guarding against fraud please visit http://www.sec.gov/investor/pubs/affinity.htm




“Red Flags”


To prevent thieves from entering your house you take the necessary precautions. You lock doors and windows. When you go on vacation you may leave a few lights on. You may even have a neighbor pick up your newspaper and mail so it appears that someone is home. All of these things are done to deter thieves so your house and possessions remain secure. Similarly, as an entrepreneur you need to take necessary precautions while trying to obtain funding.

Scam artists, posing as legitimate investors, prey on an entrepreneur’s intense desire to find funding. FundingUniverse.com is committed to providing a safe environment for entrepreneurs and investors. FundingUniverse.com will soon be available for use by only angels and angel groups that complete a detailed application process that includes interviews and signed documents confirming the legitimacy and intentions of each individual or group. In addition, we will continue to accept referrals from our already-approved members.

While we are doing what we can to prevent fraudulent investors from entering the site, as an entrepreneur there are some things you need to watch for. (Keep in mind that these tips are merely guides to help reveal potential danger. There is a possibility that legitimate investors may or may not follow some of these practices.)

Meet Face-to-Face

Meeting a potential investor face-to-face is critical. If an investor is about to invest several hundreds of thousands of dollars into a business idea, the investor should be eager to meet with you. If not, beware.

No Money Up Front

Generally, investors will not ask for money up front, and they will not ask you to wire it to them. If you ever have questions or concerns ask the investor. If the investor is unwilling to answer to your satisfaction, then move cautiously before entering into an agreement.

Beware of Foreign Funding

The Sophisticated Nigerian 419 Scam is one such scam. Beware of any international “firm” which requires a “fee” to be sent through a wire transfer to a foreign bank. The FBI warns against this and other similar scams. Take a moment to familiarize yourself with other scams where you could be targeted. (http://www.fbi.gov/cyberinvest/escams.htm).

Guard Against Unaccredited Investors.

An accredited investor, according the U.S. Securities and Exchange Commission is one who:

· A bank, insurance company, registered investment company, business development company, or small business investment company;

· has an individual net worth of or joint net worth with spouse, that exceeds $1 million at the time of purchase

· a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

· a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

(For additional information about accredited investors visit http://www.sec.gov/answers/accred.htm)




Guy Kawasaki’s Tips on Raising Angel Capital

In a previous blog entry, Guy Kawasaki provides valuable tips and suggestions regarding raising money from angel investors. If you are an entrepreneur seeking to raise money, Guy’s tips will help you to understand the motivations behind an angel’s investment.

I really like the way that Guy presents his content. Most of his suggestions are focused on thinking first about the investor’s needs — not the entrepreneurs. If an entrepreneur can think about the motivations and desires of the angel investor, she can then cater her executive summary, business plan or VideoPitch in such a way that it is appealing to the investor.

Don’t underestimate the importance of the presentation. Present your idea or concept in way that makes it easy for the angel to want to contact you:

  • Prove that you can execute
  • Be realistic — Don’t exaggerate your financial projections or underestimate the difficulty of acquiring new customers
  • Be weary of saying: “All we need is 1% of this quadrillion dollar market…”
  • Be thorough — show that you have spent the time necessary to present a well-though out proposition