Danger Zone

Uncommon Sense

Lewis' advice is simple, direct and common sense. It also begs the ques tion: Why are so many entrepreneurs plagued by scams that seem to have an obvious escape hatch? If a small-business owner seeking capital would only stop and think before making a move and spending unnecessary cash, shouldn't the aforementioned cons be easily avoided?

You might think so, several securities administrators and financing experts say, but eager entrepreneurs are often blinded by their own business vision.

"The biggest problem is entrepreneurs don't understand how brokers work and what they can expect from their brokers," says Stewart-Gordon. "They think of it as being a turnkey service: 'I'll give you X amount of dollars, and you'll give me a finished product.' It doesn't work that way. I'm opposed to giving a broker an advance fee. If he doesn't think he can sell it [and profit that way], there's no reason to do business with him."

Others believe entrepreneurs focus their minds and energies too much on their products or services. They've already come up with what they believe is a wonderful idea; shouldn't everything else flow naturally from that? But people who develop good products and ideas aren't necessarily the most savvy businesspeople, remarks Utah's Griffin. "Entrepreneurs tend to want to believe in good things happening-especially when they're under pressure to get financing for their company," he says.

Dave Barrie learned that hard fact more than a decade ago. Back in 1985, the Dallas entrepreneur was running a $5 million software and services company and needed to raise $500,000 to create another division. A pair of venture capitalists promised him the money within 90 days. All it would cost him was $50,000 in various fees. A month later, the two would-be saviors found a more lucrative project . . . and walked off with Barrie's money.

Barrie has bounced back and in fact now lectures on how to obtain capital without taking unnecessary risks. He also guides others through the SCOR process with his business, Small Corporate Offering Co. Although he asks a $3,000 fee in advance, he subtracts that from the money he takes after completing the deal. Despite his experience, Barrie understands what leads inexperienced entrepreneurs to hand over their savings to a seeming financial angel.

"They seemed to have good credentials. They had good references," Barrie recalls of the venture capitalists he dealt with. "I just didn't get into checking out what they were going to do for me and asking 'Well, if it doesn't work, what happens? What's the down side?' I didn't have the experience. Now I do-and I ask all kinds of questions."

Brian Steinberg, a writer in Washington, DC, has contributed to The New York Times, The Washington Post and Entertainment Weekly.

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This article was originally published in the August 1996 print edition of Entrepreneur with the headline: Danger Zone.

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