We would all be wise to remember that when a lot of money is being thrown around, some con artists will arrive. Scammers will haunt the edges of any scene where people are giving out something valuable. Those of us who read Hacker News are aware of the reputable investors who mean well, and who clearly want to help facilitate the creation of wealth. Anyone who reads this site can name at least a dozen investors and/or incubators that are honest. But we should not be innocent: whenever there is a gold rush, there will be liars and cheats.

I have written about this before, but in 2009 I was hired by a small startup in New York City. At that time I lived in Virginia but I had wanted to move to New York, and this job offer was the perfect chance. So I moved to New York. I had worked with startups in Virginia, and I had high hopes about the startup in New York.

All the same, what I saw at the startup was disturbing. The financing seemed questionable. The central figure ran what he called an investment firm. That meant he reached out to potential investors and he tried to get them to invest small amounts in his various projects. At any given time he had 10 to 12 projects that he was raising money for. He would raise $100,000 or more to get a startup going. Each project might have 10 investors.

I worked at that place for a few months, and then I was told that they had to close down because all the money was gone. The project manager/COO told me that they'd spent $80,000 of the $100,000. I was not clear why things were closing down. He told me to send in my final invoice. I did. They never paid me. 2 months later I was told there was no money to pay me. I had long (sometimes angry) conversations with the COO about the money. He gave me some reassurances about the money, how much had been spent, how much had been raised, how much there was. But he also said that the main figure had never granted him (the COO) access to any of the financial statements, so he was not able to speak with 100% confidence about how much money there had been, or still was.

It is possible that all of this can be put down to the normal chaos of startups. But it seemed like the main figure here was raising $x amount for a startup, spending 80% of the money, and then telling investors that, sadly, the project had failed, they had not gotten enough momentum, these things are very risky, etc.

Maybe he had an understanding with the investors, but I very much had the impression that he kept 20% of the money for himself. And he was doing this constantly for 10 to 12 projects. He went to dozens of events in New York and in Boston, he was constantly pitching, constantly raising money. He was very good at getting people to hand him money. But I have my doubts about whether the money was being spent the way the investors would assume it was spent.

The normal chaos of startups can hide a lot of corruption. You can use the riskiness of startups as a cover for fleecing investors and delivering very little. In the end, all you have to say is "I am very sorry, these things are very risky, I'm sure you knew this was risky, we did our best but we failed to get momentum." And of course, startups are risky, that part is true, but the investor has the reasonable expectation that if they give you money, then you did everything possible to make your startup a success.

Here is a bit of age old wisdom: let the invest beware. (And likewise, beware of the exploitive investor pitch.)

The fact that there are some famous investors whose integrity is well known should not distract anyone from the fact that there are scam artists in every walk of life.