Startup entrepreneurs are optimistic, enthusiastic risk-takers determined to take the world by storm. That kind of energy is essential to business success, but when it's coupled with lack of experience it can make would-be businesspeople prime targets for con artists. The resulting losses undoubtedly derail many great ideas before they come to fruition.
"Unfortunately, we continue to see a lot of early-stage entrepreneurs get defrauded year in and year out," says David Weiss, president of the Better Business Bureau serving greater Cleveland. "What they need to develop is a healthy dose of skepticism and a mindset that won't allow them to suspend disbelief, no matter how attractive an offer looks."
This year's crop of tricks and traps are variations on cons dating back generations. The way to avoid all of them is to exercise common sense, do extensive research before entering into business with anyone, refuse to believe everything you read (or see on TV), and verify claims. Here are five common startup scams.
1. The Scam: Free Money
Charismatic individuals claim they know of funding sources that don't have to be repaid. Buyers who send several hundred or thousand dollars get directories filled with information that's readily available elsewhere for free. Promised "government grants" either don't exist, or are designed for nonprofit entities or scientific researchers. "They promise money-back guarantees, but in order to get your money back you have to prove you applied for 10 grants and were turned down," Weiss says.
Sad Story: "We had a local business owner who received a telephone call telling her she'd received a $12,500 business grant. The caller just needed her checking account number in order to direct deposit the money. They took her for $300, and their phone number is now disconnected," he says.
The Lesson: There's no such thing as a free lunch — or free lunch money.
2. The Scam: Patent and Invention Services
Business "experts" evaluate your invention or business idea, declare it a sure-fire winner, and ask for thousands of dollars to secure intellectual property protection, help you find manufacturers, and do marketing. They claim to have helped many entrepreneurs hit the jackpot, but when you ask to talk to other clients, they tell you that information is "proprietary."
"Getting a product to market is very complex, and there are consultants who specialize in it. But before you hire anyone, vet their company thoroughly and demand to speak to multiple clients about what they paid and what the company did for them," Weiss says.
Sad Story: When he worked for a consumer protection agency in the '80s, Weiss sent an idea for a product widely known to be illegal — fluoride chewing gum — to an invention marketing service to see how they'd react. "They loved it, told me they had connections to big people in the industry and could make me millions," he recalls.
The Lesson: Cautionary information about specific scam operations and operators is available online. Do your homework; the Federal Trade Commission has information about patent scams.
3. The Scam: Advance Fee Loans
Companies promise loans to would-be entrepreneurs who cannot get capital from banks or investors.
Pushed by telemarketers, online marketing, and print advertising, these "lenders" promise that you'll qualify despite your credit record, past bankruptcies, or lack of assets. Desperate entrepreneurs need only send a few thousand dollars to cover the "loan-processing fee," "transfer fee," or "bank charges" before their loans will be funded.
Needless to say, once they receive the fee, the lending outfit evaporates. "Anybody with an ounce of common sense, who really thinks it through, would wonder why anyone legitimate would lend them money sight unseen," Weiss says.
Sad Story: "We had a lady who was asked to send $2,000 in order to get a promised $50,000 loan. She sent in $2,000 and when they realized they had a sucker on the line, they told her they needed $800 more. She sent the extra money and never heard from them again," Weiss recalls.
The Lesson: Don't send anyone money up front — ever.
4. The Scam: Work From Home
Whether it's doing medical billing, assembling dolls, or owning your own vending machines, promoters will promise to set you up in easy-to-master, no-education-required, home-based businessses. It's only after you've made an investment that you find out the business isn't so easy.
Mastering medical-billing software (often full of glitches) doesn't help you attract physician clients; assembly kits are so complex they're impossible to complete in a timely manner; vending machines turn out to be in unprotected territories that are not well-serviced. "There are legitimate home-based business opportunities, but the devil is in the details, and there's a lot of over-promising here," Weiss says.
Sad Story: "The envelope-stuffing scam has been around forever, and it's a flat-out pyramid scheme. An ad in the newspaper attracts home-bound and disabled people by telling them they can make money at home stuffing envelopes. They send money in to get started, and what they get is a mailing list and a pitch they can send out asking other people for money to learn about stuffing envelopes," Weiss says.
The Lesson: Starting any business takes research, education, and hard work — it's never easy.
5. The Scam: Wealth-Building Seminars
Few people actually get richer, but many people get poorer attending these meetings, which are often held at hotels near airports. Would-be entrepreneurs, lured by "free tickets," often attend hoping to get business tips or money they can use to start their own companies.
At the seminars, business ideas such as stock-market or real-estate investing are "tree topped" — meaning they are treated superficially — followed by a heavy sales push for tapes, workbooks, and DVDs containing "secrets for success." "Few of the people in these seminars will get wealthy, but many of them will spend $2,000 to $5,000 on dense, poorly produced materials that don't contain any brilliant insights," Weiss says.
Sad Story: "Entrepreneurs have been known to spend their nest eggs on these seminars, when the only people guaranteed to get wealthy from them are the people running the workshops," says Weiss.
The Lesson: Search out the many free and low-cost resources available for entrepreneurial training and advice, starting with the has information about patent scams.