How To Spot A Startup Con

How To Spot A Startup Con

How did Bernie Madoff con so many smart people out of $18 Billion dollars during an over 10-year reign running a Ponzi Scheme? That’s a great question… especially when you take into account that in 1999, a brilliant Quant, Harry Markopolos, was asked to create a fund that would duplicate the returns of Madoff’s fund. In four hours, he determined that it was mathematically impossible for Madoff to achieve his reported performance results.

Markopolos is still making waves and uncovering possible fraud today. In August 2019, he was credited with causing a huge drop in the share price of GE, after announcing he found fraudulent practices in GE’s financials. But back in 2009, Markopolos reported his Madoff findings to the SEC. The SEC audited Madoff’s fund. Madoff went through several SEC audits over the decade and yet those government auditors reported no irregularities.

Sussing Out A Con

How does one spot a Startup Con? I know a lot of people, like the folks that invested Theranos or Communiclique or Trustify wish they spotted the con? Want to know how to spot a startup conman like Elizabeth Holms, or Andy Powers, or Danny Boice or Jennifer Mellon or Matthew Pugsley? Want to know how to spot a con job so you’re not the next victim like Theranos victim Rupoer Murdock, or Communiclique self-proclaimed “victim” Ram Reddy, or Trustify victim Anchorage Capital? Just follow these simple steps.

  1. Don’t make an investment based on what you hear… verify the facts
  2. Learn how to use google
  3. Use Google (I know… it seems stupid that I have to tell people who with money to invest to use google but you’d be surprised, or maybe not surprised, how many bonehead, supposed professionals didn’t google a con before investing in an obvious con).
  4. Check to see if the company is in good standing in the state in which it is registered (For instance, Challant Health)
  5. Ask questions
  6. Ask yourself does it sound too good to be true and if it does… be highly skeptical
  7. Does the person with whom you’re dealing claim to be anointed (For Example: A Harvard Grad, A Succesful Founder with Multiple Exits, A VC, An Author or is he like Andy Powers who falsely claimed to be a multi-millionaire from his early investment in Uber) – then verify
  8. Ask someone you can trust who has some expertise in the area – (ask me here)
  9. If you don’t understand something, make the person with whom you intend to invest make it understandable and if they can’t… don’t assume you’re too dumb to understand… assume they are bullshitting you and that’s why they are not able to make their idea understandable. Over a decade the SEC investigated and audited Bernie Maddoff. The SEC auditors found the documents, too confusing, too difficult to understand, too technical and boring and skipped some parts. They assumed that they didn’t understand Madoff’s absolutely improbable investment thesis because they were not as smart as he and not because it was a mathematically unworkable system.
  10. Don’t be impressed with the trappings of wealth… for instance, Andy Powers lives in a $35 thousand a month Pacific Palisades Chalet but he’s hasn’t paid rent in over 7 months and his landlord is suing to have him evicted.

The Tools of A Con Artist

Con artists often employe John Kotter’s 8 steps of change model?

  1. Establish a sense of urgency – do they say things like, we’re about to close our investment round, or we’re being very selective about who we allow investing? If so is it real, or are they trying to project a sense of exclusivity to feed your ego and urgency to get you to invest before you investigate?
  2. Form a powerful coalition – Do they say things like, “I’m a former investor in Uber,” or “our customers include Uber, FedEx, AirBnB, and the very prestigious law firm of Wilmer Hale,” or “former Secretaries of State Henry Kissinger and former Secretary of State, George Shultz are on our board?” Because those were tactics of Communcilique’s Andy Power’s and Theranos’s Elizabeth Holms deployed.
  3. Create a Vision – Do they say something like, We are the Uber of Private Investigators, or we are very similar to “Twilio who is valued at $1 billion although we are profitable,” like Ram Reddy was quoted to say about the fraudulent company Communiclique. Are they trying to associate their company and vision with the kinds of companies you wish you had a chance in which to invest?
  4. Communicating the Vision – Spend a lot of time promoting this hypey vision, for instance, Trustify racked up over $240 thousand in fees from their PR firm in six months (and then didn’t pay them). Is the ratio of buzz to verified business success inverse to what you’d expect of a real company?
  5. Empowering others to act on the vision – removes obstacles to investment, for instance, make the investor feel like they are investing alongside other smart people (For instance Elizabeth holmes collected a literal whose who of investors i.e. Tim Draper, Betsy Devos, Walmart’s Walton Family, Rupert Murdoch, Marc Andreeson,
  6. Planning for and creating short term wins. … faking valuation reports like Andy Powers did at Communiclique (see image below), or sending out a newsletter full of false bravado like Trustify’s, Danny Boice about all the progress he was making at Trustify. These devices are designed to make people feel like they should stay along for the ride and maybe double down their bets. In a Ponzi scheme like Madoff’s, money from later investors gets distributed to early investors so that early investor testimonials and referrals feed the pyramid.
  7. Consolidating improvements and producing still more change – Talk about all the new initiatives, customer wins, new product offerings that will build on the current success. Like Danny Boice lied about Government Contracts or check out this News Letter he sent out a month before the company crumbled.
  8. Institutionalizing new approaches – Theranos CEO, Elizabeth Holmes tried to make her investors feel that her system was institutionalized by closing the Walgreens deal.


Con men exercise power over their marks through 2 of the 6 forms of power defined in social psychologists John R. P. French and Bertram Raven 1959 Basis of Power study. According to Wikipedia, those two powers are:

  1. Referent Power – Referent power is rooted in the affiliations we make and/or the groups and organizations we belong to. Our affiliation with a group and the beliefs of the group are shared to some degree. As Referent power emphasizes similarity, respect for an agent of influence’s superiority may be undermined by a target of influence. Use of this power base and its outcomes may be negative or positive. An agent for change motivated with a strong need for affiliation and concern of likeability will prefer this power base and will influence their leadership style. Ingratiation or flattery and sense of community may be used by an agent of influence to enhance their influence (Cranky Note: Volunteering for charitable causes – see this post) and/or participating in religious communities. Charities are great fishing holes for potential scam victims).
  2. Expert Power – Expert power is based on what one knows, experience, and special skills or talents. Expertise can be demonstrated by reputation, credentials certifying expertise, and actions. The effectiveness and impacts of the Expert power base may be negative or positive. According to Raven, there will be more use of Expert power if the motive is a need for achievement. The ability to administer to another information, knowledge or expertise. (Example: doctors, lawyers). As a consequence of the expert power or knowledge, a leader is able to convince their subordinates to trust them. The expertise does not have to be genuine – it is the perception of expertise that provides the power base. When individuals perceive or assume that a person possesses superior skills or abilities, they award power to that person (Cranky Note: Speak technical gibberish like the Chairman of the Board, Ram Reddi, spouts technical buzzwords during his speeches).


Folks, it’s your money… but

Just a few little cases I sited here represented people losing over $20 Billion. If those people want to throw away a billion here and there, that’s up to them. I’d rather get my write-offs from doing good versus allowing some scum bag to live in a $35 thousand a month home. I’d rather help rebuild storm-ravaged communities or pay-down college dept, or buy out the world supply of Lucky Charms.

Don’t just invest because your friends got suckered. Don’t invest because you are so sad you missed out on Uber and you’re anxious to get on the next one. Do a little research. Scratch a few surfaces. Ask a lot of questions. Be skeptical. Ask Mr. Cranky.

Or… just throw your money away.