Crowdfunding Is More Like 'Crowd-Frauding'

There is a technology investing gold rush going on in this world. Every scam artist and college flunky is coming up with all sorts of crazy ideas. The first thing they do is go to their relatives and friends to ask them to invest and tell them how their ideas are worth millions.

Now, with proliferation of the Internet, they are going after the masses to find suckers to invest in their crazy deals. It’s called “crowdfunding,” but I call it “crowd frauding.” The love of investing in next Facebook and being rich brings all these suckers to investing in these deals. You can always find some jewels, but most of the time these investors will lose their money because most of these startup future billionaires will run away with their money or they will never succeed.

There is a lesson to be learned in history from the gold rush days in San Francisco. Thousands of people went to the Bay Area looking for gold. Most of them wasted their life savings and never made any money panning for gold, except the businesses that sold the shovels, picks, Levi’s jeans, hats, etc. These are the gold-rush days of tech startup investing, and hence a lot of crowdfunding investors will be ripped off.

When you invest in these ideas, you hardly see any agreement or formal legal document. Even if you see an agreement, it’s not worth the piece of paper it’s written on. Most of the entrepreneurs don’t disclose much about themselves anyway. These people could be criminals, fraudsters or plain scam artists. Most of them have no success record. Hence they will have a slick PowerPoint presentation that makes no sense at all. Thanks to greed, a lot of people are investing in these deals hoping to become rich. But, they would be better off following Warren Buffett’s advice and buy S&P 500 ETFs, preferably from Vanguard.

The majority of people are not happy with only 5 percent or 6 percent return per year. We all want to double, triple or quadruple our money within six months. That is why we make such good suckers.

My advice to these greedy people is to keep your money, invest it safely and not go into crowdfunding because it is not “crowdfunding” it is “crowd frauding.” In most cases, you will lose 99 percent of your money.