March 9, 2022 In scams, Startup

Startup Scams and the Bad Choices Every Entrepreneur Can Make

When is a startup not really a startup? It’s a surprisingly necessary question. If you’ve ever been burned getting too close to a startup that isn’t really a startup, that’s a mistake that you probably won’t make twice. 

But if you’ve never been up close and personal with a startup scam, startup scheme, or simply a cascade of bad leadership choices made by a CEO who really shouldn’t be a CEO, the temptation to hop on board what seems like a deep-pocketed, world-changing gravy train can be overwhelming.

That’s how scams work.

There’s a lot of money to be made in entrepreneurship, for sure. I don’t want you to fall into the same money trap I see both new and veteran entrepreneurs get caught in over and over again.

The Temptation of Perceived Value

Let’s put that temptation into more understandable terms – or maybe less understandable. The question “Is a startup really a startup?” comes from the same place as the question “Does an NFT really have any value?”

One side answers yes, absolutely. Not only does an NFT have value, it has an intrinsic value that is so misunderstood that to be in the current crop of forward-thinking NFT investors is to set yourself up for a once-in-a-generation windfall of wealth creation.

Twice-in-a-generation if you count crypto.

The other side says no. NFTs are, at best, a derivative crypto scam and, at worst, a digital Ponzi scheme. Yet, anyone who bought a Bored Ape back when Bored Apes were cheap is definitely laughing from the very top of that particular pyramid.

For now.

Most of us – like, 99 percent of the world – ultimately just shrug at the question, because the answer is more nuanced and complex than we have time for.

But maaaaybe we’ll play around on OpenSea and Decentraland – just in case.

When a Startup Becomes a Scheme

That same scenario, applied a little bit differently but almost always using the same playbook, describes how some entrepreneurs found startups that aren’t really startups after all, but are mini-financial-market-makers.

Their market currency is options in a startup that may (or may not) raise an ungodly amount of money touting a science, business model, or investment vehicle that’s more nuanced and complex than most people want to take the time to understand.

A real-time example can be found in the swan song of the SPAC craze.

Is a SPAC really an IPO? It depends on whom you ask. Legit Sand Hill Road VC firms and money-flush private equity funds legitimized SPACs as simple financial vehicles to take their portfolio companies public with a lot less “fuss.”

“Fuss” is just a fancy word for “due diligence.”

But it doesn’t take a SPAC for a startup to start looking less and less like a startup and more and more like a scheme. Just about any infusion of capital into a company to fund an unproven science or business model will do. 

The Drive for Investability

If an NFT exists only as a data point on a blockchain, does it still have value?

And if a SPAC offers shares to the public before the thing the public is investing in is a known entity, is it a public investment in a company?

If a startup spends all of its time, capital, resources, and mindshare raising its next round, is it really investable?

Again, the nuance and complexity of that question might make you shrug.

Raising money is a responsibility, it’s rarely a requirement. Outside funding is never an answer, it’s simply opening a box of more and bigger questions. It’s a weight dropped on a startup’s shoulders, not steroids injected into the company burn rate.

And sure, every startup needs that injection of steroids – operating cash to make a go at growth and scale. Sometimes that cash comes out of founder pockets and from under couch cushions. Other times, more often than most people think, it comes from customers in the form of revenue and profits.

But the injection that makes the splashiest headlines – for that matter the only headlines – is the injection of funds that comes from an investor, especially a well-known, deep-pocketed investor.

You know, like Softbank.

But once a startup gets on that investment treadmill, there often comes a point at which that startup exists only to get to its next round. It’s not a scam. Those are much easier to spot. It’s a scheme.

Schemes can start innocently enough. No founder in their right mind wants to turn down the chance to extend their runway. And every CEO who is really a CEO has to make a decision on how far they’re willing to extend or bend their vision to conform to the new rules that outside money always brings. 

The good CEOs take the money not because they need it, but because they have a plan for it. When you decide that your startup can exist only with the injection of steroids in the form of outside investment, make sure that you have that plan and you’re willing to stick to it.

Because if you don’t, the road to the scheme starts with that one bad leadership decision.