Thomas Martensson got off the plane one morning in Houston in 1998, as the Internet bubble raged. He was here to raise money for his new venture, which he called Instore.com, and I had arranged for me and some other investors I knew to come hear his pitch. Thomas was introduced to me by David, the ex-stepbrother of Adam, my good friend from college who swore that I absolutely, positively just had to meet and hear this extraordinary businessman and his “opportunity.”
If you’ve got good ears, and if you don’t before your first time, you certainly will after, you can almost perceptibly hear it in the voice of the promoter. This was my first time, and I thought I could almost hear it in every one of their voices – in Adam’s, David’s, and in Thomas’s – but though they all seemed somewhat over-excited, they were all persuasive, and I agreed to hear the pitch. Thomas, a Swede, was traveling to several US cities to meet investors, and we decided he would stop in Houston. I would pick him up at the airport and meet at one of the hotels there.
If you don’t hear it in the voice, then you might see it in other things. I remember thinking that his luggage was awfully nice, the absolute top of the line, the same with his winter jacket, but I overruled that too thinking it was just a European thing to have the nicest designer stuff. Besides, David had told me that Thomas had been successful in his first venture, so that explained how he had money.
His presentation was smooth, except for a verbal tic that he had and a bit of a nervous laugh. I overruled those too, choosing to give him the benefit of the doubt: who was I, a liberal, to discriminate over a verbal tic, and here he was making a business presentation in a language other than his first, something I had never even attempted. Instore.com was designed to capitalize on Thomas’ contacts in the cell phone business, and was to provide a sales, distribution, and maintenance program for corporate cell phone fleets. As Thomas described it, employees of large corporations received their phones from their companies, and it was a pain in the ass for their IT departments to manage those programs. Instore was designed to outsource the rapidly growing corporate cell phone programs, and it had a leg up, according to Thomas, because of his deep contacts with the Swedish phone maker Ericsson. It sounded good, and we promised to think about it.
If you don’t hear it in the voice, and you don’t see it in the luggage or clothes, then you might figure it out from the legal work, or lack thereof. Legitimate startups get good lawyers to draft solid paperwork, often reams and reams of incorporations, rights documents, stock offerings. Indeed, there are reputable law firms whose practices revolve around the creation of extensive documentation required to start a venture-backed company. I was familiar with this type of paperwork, because I had previously backed a startup venture that was now doing well. Instore, though, was “in a hurry” to take advantage of the “extraordinary” market opportunity, so there would be some paperwork but the detailed stuff would be forthcoming later. Okay – I took a deep breath and accepted it. We ultimately decided to invest a hundred thousand dollars in the latest world beating, earth-shaking Internet firm, Instore.com.
David would later insist that he himself had lost all his money in Instore, although he hadn’t actually paid for his shares, but had instead loaned some money to Thomas and received his shares as payment for rounding up American investors. Of course, he told me that afterwards, after lying to me originally about paying for his shares. He insisted that he was stunned and furious at what had happened, that he knew nothing about it beforehand, and he even hired a lawyer in Stockholm to pursue Thomas, though nothing ever came of it. And in fact, Instore did hire people and put up a server. I would occasionally over the months check the site to see how it was coming and I was always somewhat concerned that it didn’t improve more rapidly; it seemed to be the same pages each time I visited. When I pressed, Thomas assured me that it was the secret sauce behind the pages, all the stuff linking the corporate customers to the Instore system, that was so critical. He claimed they had some customers too. David would accuse Thomas of making off with half of the $6 million that had been raised from investors, of using the money to party in San Tropez, buy a sports car, have a luxurious wedding in Paris for his wealthy French girlfriend. Thomas claimed that all the hard work and failures at Instore had actually bankrupted him and he didn’t have a Swedish krona to his name anymore. All I felt was degraded embarrassment, and I wanted to get as far from it as I could and forget it while at the same time always remembering it. Like most good educations, this one was expensive.
I say it was my first time. But really, now that I think about it, it was my second. Curiously, my first one also occurred in Europe. I was in college and traveling in Paris, staying in hostels and the like, and suddenly there was a card game conducted on a box in the street. There was a dealer, and two players, apparently, like me, pedestrians from the street caught up in the game. I should have heard it in the voices, especially since they kept changing languages, from French to German to who knows what, as they tried to find my frequency. “American?” the dealer finally asked, and I nodded, and with that the cards went down One, Two, Three, and for 20 bucks I just knew – just KNEW – where the ace had landed. I pointed to my card. He turned it, and it was of course, anything other than an ace. And just like that, in the blink of an eye, my money was gone. And I suddenly realized that the two other players were not actually other suckers like me, but partners with the dealer. For a moment I thought about demanding my money back. I did a mental calculation: three of them versus one of me on some Paris backstreet, and $20. I walked away, feeling the same degraded embarrassment I would feel ten years later over much more Instore money. For a college student traveling in hostels, $20 was an expensive education.
And what have those and other educations taught me?
First, be initially skeptical of any investment opportunity. Not to the point that you risk ultimately ignoring the opportunity, but to the point that you possess a good first line filter.
Second, be initially skeptical of anyone presenting an investment opportunity, including people you know well, for they may be fallible as well.
Third, you are better off in most cases paying a management fee to an intermediary, like a reputable fund manager, than venturing into a field in which you are a novice and about which you know little.
Fourth, listen to what your body is telling you – if the opportunity or the promoter feels wrong, they probably are.
Fifth, if you’re not sure or feel ambivalent or confused about an opportunity – don’t do anything, just take a pass.
Sixth, be careful with your capital – once it is lost, it may not be easy to replace.
Seventh, diversification can have benefits – unless an entire system has become fraudulent, which is possible, you may find some safety in a crowd.
Eighth, beware of rapidly rising markets, they draw fraudulent people and produce more frauds than any other market, as people get desperate not to miss out. If you’re seeing the opportunity – whether it is Internet stocks, or houses, or gold, or whatever – on the front page of US Today, it may not be too late, but it’s probably getting close to it.
Ninth, study and follow the best, as they have a history of being able to smell fraud and avoid it.
Tenth, do not be greedy about anything. Greed and ignorance are the two preconditions for a victim of fraud.
Eleventh, if it happens to you, don’t beat yourself up for too long. Virtually everyone is defrauded at some point in their lives. Make sure to learn from it.
I’ve no idea where Thomas Martensson is today, and I don’t care. I’ve made successful investments before him and since. One of the curious things about fraud, is sometimes you’re never absolutely sure that the promoter intended outright fraud, or something just somewhat shy of it. Regardless, I’ve decided it’s better to leave nothing to chance, and I’ve decided I prefer absolute rectitude in all walks of my life: investments, politicians, friends, associates and so forth, because really, there’s not much that feels worse than that feeling of degraded embarrassment that you get when you realize you’ve been had.
I’m Leo Gold. This is The New Capital Show.