Avoiding Capital Sourcing Scams: Middle Eastern Venture Debt
An entity purporting to be a low-cost venture lender from the Middle East recently "scammed" a prospect of MSC's. We warned this prospect that we had evaluated this type of lender before, and that we believed it highly likely to be a scam. Out of desperation, she moved forward. It turned out to be a scam, and she lost somewhere in the neighborhood of $100,000. The pitch she heard went something like this, "We offer low-cost bridge loans to innovative companies experiencing liquidity issues likely to be resolved by upcoming equity financing rounds." Our prospect responded and met with the lender, the lender provided capital sourcing case studies and various "proofs" of good business practices, and then the lender provided a term sheet for a multi-million dollar loan at a low rate of interest with a manageable repayment schedule. This term sheet included (a) a term for a financing fee to be paid upfront and (b) a contingency for "due diligence." The lender then conducted said "diligence," and it produced an agreement for a Promissory Note. The prospect signed it, which triggered the lender's request for the financing fee. The prospect, confused, indicated that she thought the lender would deduct the fee from the proceeds of the loan. The lender indicated that would violate some sort of Middle Eastern custom, and the prospect acquiesced. The lender then ghosted her and kept the financing fee…
This transaction reinforced our understanding of how difficult it is for Founders to navigate the capital markets. Founders need to tell "great stories to great audiences" to avoid scams and maximize their chances of capital-sourcing for their company's needs.
What makes a great story? If a company is already generating at least $1MM annual revenue, then it needs to be capable of achieving $100MM annual revenue within 3-7 years. It needs to know how it can quickly win new customers from a robust sales pipeline, how it can expand with its existing customers, and how it retains customers. It needs a team that has done this before. It needs a credible staffing plan with pre-defined roles and expectations for each. It also needs a pipeline for CAPITAL.
What makes a great audience? It includes both lead investors and follow-on investors. The check sizes for these investors must make sense within the context of the business's capital sourcing requirements. These investors must have been recently active in the relevant subindustry. The vehicle for raising capital must match these investors' preferences. The company's geography must also match investor preferences. Founder demographics and company social impact can also be relevant considerations.
MSC helps innovative growth companies solve their most pressing challenges, one of which is capital sourcing. Our FinOps service is affordable, takes almost ALL the heavy lifting off Founders' plates, and tells "great stories to great audiences." Contact MSC and learn why our financial operations services guarantee results.
In our “Solve It” short stories segment, we want to connect (hopefully) entertaining professional experiences to insights that Marion Street Capital derives from pursuing its MISSION, VISION, and PURPOSE. I chose "Solve It" as the title of this series because the MSC mission is helping innovative growth companies SOLVE their most pressing challenges, and because as a child, I was addicted to mysteries like Sherlock Holmes, Agatha Christie, The Hardy Boys, and Encyclopedia Brown.
At MSC, our mission is to help innovative growth companies solve their most pressing challenges. We aspire to be the first name that Founders, CEOs, and Board members consider when thinking about how to best solve material challenges for innovative growth companies. MSC exists to help entrepreneurs build sustainable, market-leading businesses so that our next generation of stakeholders may prosper.