Apr 19, 2015

Beware these slick sellers of dreams

How are the mighty fallen!

I received a letter from KPMG last week about the bankruptcy of an old acquaintance, whom we shall call Eric. It described the efforts of his trustees in bankruptcy to realise assets on behalf of his creditors — of whom I am a fairly small one.

It is a depressing tale. The accountants are pursuing properties in places such as Knightsbridge, the French Alps and the Cotswolds — some of which appear to have been transferred to British Virgin Islands companies just before the collapse. And there are rafts of shareholdings that seem to be entirely worthless.

Eric is a classic promoter. He has spent the past two decades finding speculative projects, then charging forth like a man possessed to raise money for them. He has tackled many industries: engineering, mining, technology and transport, to name but a few. Most of the schemes have been early-stage, high-wire ventures. Few, if any, have made money for investors.

But like all promoters, his enthusiasm over the years remains undimmed. Whenever he meets money, he starts pitching, with extraordinary optimism and confidence, which can be beguiling. Institutional investors, venture capitalists, hedge fund managers, angel investors — he has sold exciting dreams of huge fortunes to them all. Every promotion is a surefire thing — until it isn’t. Is he a fraudster? I don’t think so, but who knows? I lent him money because I trusted him. Quite possibly he suffered bad luck, or was simply wrong — but not necessarily deceitful.

There is always a fine line between the obsessive entrepreneur, who believes fervently in his business, and will do almost anything to raise the finance to see it launch, and the crook who will lie barefaced and steal from backers. After all, most inventors need a promoter partner to raise the capital for their brainchild — typically the two personality types are different. Indeed, perhaps the single most important skill for any entrepreneur is the ability to sell a concept to would-be investors.

Of course, there have been various prospectus laws for more than a century, designed to protect backers from outright cons and swindles. But we live in a time of unprecedented amounts of hot money: the Swiss and a number of other European nations have even sold bonds offering negative interest rates. So owners of capital are more desperate than ever to find a return, and are therefore more vulnerable than would be normal.

Moreover, this generation of start-ups is more focused on raising equity than ever before. Indeed, many such founders seem rather better at fundraising than managing a company, making products, generating sales and so forth. Their presentations are super-slick, their knowledge of venture capital terminology is truly impressive. I meet companies that want to raise millions to go international — on the basis of British operations with revenues of just £1,000 a week. Too many think they march in the footsteps of Facebook, Twitter, Uber and the like. I admire their audacity, but their chutzpah and sense of priorities scare me.

I also worry that the explosion of companies raising cash through crowdfunding platforms is becoming a bubble. Often the valuations are ludicrous. I strongly approve of the principle that individual investors should be able to access private, early-stage, high-growth businesses. But I fear few punters in these deals will make a profit. And I dearly hope widows and orphans are not gambling their life savings on such long-shot schemes. After all, it is the nature of capitalism that many enterprises end up failing. Yet such painful and expensive experiments are the method by which we advance. As Michelangelo said: “The greater danger for most of us lies not in setting our aim too high and falling short, but in setting our aim too low, and achieving our mark.”

Promoters are not a new phenomenon. One of the more notorious was Horatio Bottomley, who was variously a media baron, MP, editor and financier in the early 20th century. He was the first proprietor of the Financial Times, and published Hansard’s records of parliamentary debates. He created a magazine called John Bull, with a circulation of 1.5m, and pushed corrupt sweepstakes and dubious bonds. But in 1922 he was convicted of 23 charges of fraud. The court permitted a 15-minute adjournment each day so that Bottomley could drink a pint of champagne for “medicinal purposes”.

Each great industrial advance is flogged by promoters of every breed and level of credibility: the digital revolution, biotechnology, natural resources, alternative energy. Out of the mania comes innovation and human progress. The man who welded together the London Underground was a controversial American tycoon called Charles Tyson Yerkes. This robber baron took control of the main four lines in the five years to 1905, electrified them and initiated the core of today’s Tube. Like a number of promoters, his valuable legacy remains — despite his suspect methods.