Lost in Trust
Trust everybody, but always cut the cards. The modern state of dealmaking still frequently misses one crucial stage: verifying business partners. Power up your deals with turning bad habits into good ones.
Christopher Columbus searching for a an investor
Let’s get back for a second to the origins of first startups and VCs.
When you try to answer who should be considered as “the first”, you will find a lot. So let’s not focus on tech companies nor modern businesses the key feature is scalability. After one of the best modern historians, Yuval Noah Harari, let’s focus on the first time in well-known history, when a group of people (we can call them first VCs) invested a huge amount of money in a risky but promising hyper growth idea (first startup) — Christopher Columbus and his famous trip to the new land.
In 1484 Christopher Columbus referred to the king of Portugal with a proposal to finance his ships, that would blaze a sea trail to the East Asia. In those times, such an expeditions involved huge risk. A lot of ships were never coming back and there was no guarantee that Columbus’s trip is gonna succeed. King of Portugal rejected the proposal.
But Columbus, just as a contemporary entrepreneur leading his startup, didn’t give up. He went with his idea to the royals of Italy, France, England and again Portugal. Everywhere he heard “No”. And then he came up with a new idea how to convince his investors — he contacted well known lobbyists, got their support and the help in convincing the royals that that trip is going to be an unicorn. In other words, Columbus had been verified by trustworthy business people and thanks to their warranty, he finally convinced Queen Isabela II from Spain to invest in his startup. We all know that was a go for Spanish crown.
Back then, the only thing the Queen could have done to check who actually is Christopher Columbus, was to ask her advisors, search for opinions, talk with Columbus, check his knowledge and plans, verify his credibility with people that knew him. But is this enough in modern world? As a tech companies we are proud of using the most advanced tech tools to communicate, organize our workflow, get leads. But when it comes to verifying business partners, we just take somebody’s word for granted. Not even hesitating while selling our souls to the devil on a 5 year deals.
Case 1: Even sharks get sometimes royally screwed
One of the most mind-blowing examples of how you can get screwed in an investment comes from famous Shark Tank TV series, where aspiring entrepreneurs make business presentations to a panel of five “shark” investors.
In one of episodes (4th November, 2016), we saw Hilary Novell Hahn, whose company, The Style Club, was going in front of the sharks. She did great and one of investors, Mark Cuban, offered to invest $500K in her business. She of course accepted it.
But neither someone as smart and experienced as Mark Cuban nor any of producers of the show had verified Hilary earlier. If they had, they would have known that Hilary registered two companies with almost the same name. The Style Club LA formed in 2012 and The Style Club Global formed in 2015. The first company was the original one in which invested Howard Marks, CEO and co-founder at StartEngine Crowdfunding. The latter one, was the company Hilary pitched to the sharks.
Maybe if Howard Marks wouldn’t have been watching this Shark Tank episode, truly believing that it’s his investment being shown, no one would ever found out that Hilary stole the main assets of the first company like domain and logo and showed it as a work of her new company. But he was watching. Watching and turning perplexed how easily things can go wrong when you don’t monitor your investments continuously. And what is more, getting shocked how is that possible that legal team of one the sharks could have not even check the domain’s owner before signing a deal.
Case 2: Prodeum and a threat of cryptocurrencies
January 2018, the illegitimate startup Prodeum disappears after raising $11 through Initial Coin Offerings (ICOs).
Eleven dollars is ridiculous amount you might say, but isn’t more ridiculous that Prodeum successfully stole three blockchain experts identities and no one had realised it? Darius Rugevicius, Vytautas Kaseta and Mario Pazos were listed on official Prodeum website with links to their Linkedin accounts. As far as all of them actually work in the field of blockchain startups, whole story is not ridiculous to them at all. No one wants to be associated to a fake company.
Strange thing is that Prodeum was existing as startup for some time, people and investors were visiting it’s profile and no one verified if the company actually had been registered.
Nowadays, when cryptocurrencies like bitcoin and ethereum are used more and more often to purchase “tokens” from a startups, we should expect such situations to repeat frequently.
Why do we not verify?
There is no one good answer for this question. We might say, it’s because of the lack of time or the lack of money or maybe it’s because we just trust our intuition too much. The most reasonable one is nevertheless probably much more simple — we just don’t feel the value of verifying. We take the risk. Just like buying fresh rolls in the bakery at a corner.
Sometimes the only thing you need to know to close the deal is to know who is the person that came to you with an idea. What are the different businesses he or she was involved and what is his/her current business activity. But we learn all that from documents brought to us by this person or from single website of the company. No further bulb lights up in our heads.
Verifying brings us closer to our ultimate goal
It’s all about safety. When you realise it, you can sleep well.
In each European country there are both free and paid databases, where you can easily verify your business partner. Verify, so: check the board members and key people, addresses and company register dates. In paid databases you can also learn fast who is actually who in business — check their previous and current activities, financials of a company, domains and even relations with other people and businesses.
To mention just some of basic registers we all have free access to:
- Krajowy Rejestr Sądowy (KRS) https://ems.ms.gov.pl/krs/ for Polish companies,
- eJustice https://or.justice.cz/ias/ui/rejstrik for Czech Republic companies,
- Obhodny Register http://orsr.sk/ for Slovak Republic companies.
From paid ones we will easily find a huge range of useful tools like Polish previous startup, Przeswietl.pl, that aggregates data from 50 different Polish registers and databases or DataDrill that gives access to company register data from 16 European countries.
Whatever we pick, there is one thing we should remember: verifying business partner is like an insurance. We don’t use it because we want our house to be burned. We use it to be sure that in case of fire, we can stand up from the ashes without pain and blood.
References:
https://www.linkedin.com/pulse/mark-cuban-shark-tank-got-royally-screwed-howard-marks/
Yuval Noah Harari, Sapiens: A Brief History of Humankind (Harper 2011).
Article published in InfoShare 2018 Magazine — Tech, New Media & Startups Festival
Online Magazine: http://growtechmag.com/pdf/GrowWithTechIII.pdf
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