There are people who falsely represent themselves as early stage investors or financial intermediaries who do not have the capital, resources or qualifications to do a deal. These poseurs are extremely dangerous to your business.
The greatest peril is that you will unknowingly go through the presentation and due diligence process with the bogus funder, even to the exclusion of pursuing an opportunity with a legitimate source of funds. After expending time and resources that could have been devoted to a true capital raise, you end up with nothing.
Worse, you've exposed your company's intellectual property, business plans and finances, putting your enterprise at risk. The opportunity costs, direct expenses and psychological costs can be so great that you might not have the resources to continue.
It is both vital and surprisingly simple to determine if your potential funding source is less than legitimate. Just ask what deals they have done. Organized capital sources publicize their achievements, many to the point of taking out "tombstones," a stylized form of financial advertising, to publicize their successes.
Your attorney will prepare a subscription agreement before you accept the investors' funds, but before you become involved with them, determine if they meet the criteria. Ensure that private investors meet the standards set by the SEC for an "Accredited Investor" by checking SEC guidelines (www.sec.gov/divisions/corpfin/forms/regd.htm). If this is their first deal, be extra thorough in determining if they have the resources, resolve and commitment to consummate your transaction.
You must verify all claims, for a claim is only a claim until it is substantiated. If you wanted to fool someone, you could create a Web site using all the right buzz words and list a history of deals with corresponding tombstones.
There are some excellent small investment banking shops, but if you're thinking of engaging one previously unknown to you, verify it is licensed. You can verify licenses and check broker histories at www.nasdr.com/2000.asp.
Don't let knowledgeable speech, slick Web sites or flattery about your firm's prospects deter you from asking for qualifications. True investors will have no problem providing you with answers, but phony ones will have a million reasons why they can't provide answers.
Entrepreneurs work hard to develop a technology or service and to form a business around it. Don't let a bogus capital source ruin your efforts. Erwin Bruder (email@example.com) is chief economist and managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.