Jacques Mattheij

Technology, Coding and Business

Evergreen Investor Scams, Kooks & Crooks

Some ideas are so tempting, would be so unbelievably great if they were true that they will never die out.

And investors, especially the non-technical ones typically have very little in terms of defenses when it comes to evaluating these when they land on their desks in the form of an investment memo. Especially if they’re nice people, angel investors looking to help out a fellow would-be entrepreneur.

What drives this cycle of recurring nonsense (other than greed or hope) I’ll never know, but recur it does and even though I see only a very small fraction of all the proposals sent to all investors I have still seen some of these repeated over the last 20 years or so. My deduction is that these are very common.

There are two kinds of people behind these instances of investor bull-shitting, the first is the group that is clueless themselves. They simply do not understand what is wrong with their invention, they just see it as something that will improve the world in such a dramatic way that it will just have to be true. If there are problems they are aware of they may sweep these under the rug, hoping that nobody notices and they’ll fix those (they believe) as soon as they have their hands on the funding.

Even though they’re wrong and even though these people can cost investors lots of money I don’t have a grudge against them, they’re merely misguided and they don’t know enough of the technology they’re dabbling in to see it’s a repeat run, and a failed one at that. Typically thye’re not driven by the monetary angle, they’re idealists, maybe hobby inventors or successful amateurs that want to change the world. They’re out to make a difference. Not believing their idea will work hurts them, and typically gets countered with ‘don’t you want to improve the world?’.

But hope never was an ingredient in scientific evaluation, even if plenty of science is driven by hope. As soon as you think you’ve figured something out that looks great you have to put on your skeptic cap and do your best to break it.

The second group is much more evil, they will take schemes that already have failed in the past on purpose because even if they failed they were successful in attracting funding.

So the crooks recycle them and make them look really pretty for a new generation of people with more money than technical knowledge. They’ll create a whole front with fake research and people on the payroll of the start-up that will commercialize the idea, only invariably the company fails and the money is gone. Rinse, repeat for the next batch. Against these people I obviously do hold a grudge.

Here are two samples of recurring investor scams that have been around for a long time:

  • The infinite compressor
    Typically the 'inventor' (I use the term lightly) has clued in that data compression is a valuable commodity and wishes to outdo all the experts in the field with his proporietary algorithm. The technology can be demonstrated to laypeople in a very convincing way, and the results are nothing short of phenomenal. 10MB files get compressed down to 20 bytes or even less, and lossless at that. What else could you wish for. I've come across this scam 4 times now, and it is the one that triggered this post. If you're not familiar with the work of Claude Shannon and know the basics of data compression you can probably be fooled by a demo of this tech. I can think of several ways in which I could rig this in a way that would have most people fooled. What's interesting about this particular scam is that I'm pretty sure that anybody that started to work on data compression technology seems to have had the same obvious set of ideas that lead to the scam, but the very large majority is able to finish acquiring the theoretical knowledge that enables them to see the flaws in the argument before they decide to go crackpot. But datacompression sure is a tempting field, judging by the number of times this one came up over the year, in various guises.
  • Free Energy / Cheap energy
    Wouldn't it be great if free energy was available, so we could rid the world of all these evil companies and all the wars over natural resources related to energy production? It sure would be (well, there are downsides too, but never mind those, we're thinking positive here). And so, the field of energy production attracts scammers and misguided almost scientists in large numbers. Zero point energy, energy from magnets, solar panels made from hair, solar panels that produce more power than the sun puts out, that collect ambient light and on and on. There must be 100's of these, and with some regularity they appear in the popular press and sometimes even in the scientific press because they're too good to ignore. They're also too good to be true. Windmills have certain well understood design parameters and if you think you're going to break Betz then I have bad news for you. Don't bet against Betz. Solar panels have a maximum input power of about 1KW / square meter, they will always reflect some light and they will always warm up so you won't be seeing even that much from a square meter of solar panels and probably substantially less. Unless the planet moves substantially closer to the sun or we lose our atmosphere. In both those cases energy will be the least of our problems. Solar panels also have to obey the basic laws of electricity, so making one out of hair is probably not a good idea. A perpetual motion device always has friction losses, and even if you can't figure them out they'll be there. And let's for just moment suppose that you can get rid of those, there still is no energy surplus in the system, you have to take something out to make it useful. It doesn't matter whether or not there are engineering drawings or even prototypes (non-functional at the moment, we need to fix it or get that one bug out but it looks good doesn't it) of the device, it can't work.

So much for the samples, you get the basic idea.

What bugs me about all this is that it takes money out of the marketplace to throw it at projects that are doomed to fail and they break investor trust.

For every instance where an investor puts a lot of money into a project like this a real entrepreneur will find a closed door. There is only so much money available and chances are that if someone gets burned by a scammer that they’ll withdraw entirely making their funds unavailable.

Watch for the following signs that you are probably dealing with a scammer or a misguided individual:

  - a departure from conventional thinking, where conventional thinking is the last
    80 years of established science

  - extreme improvements over the state of the art

  - extraordinary claims without the evidence to back them up

  - paranoia about suppression of the invention

  - an unwillingness to allow inspection other than a (controlled) demo

  - extreme urgency in getting the deal done

  - non familiarity with the state of the art

  - belief is required to really appreciate the invention

Now of course it is possible that a great idea will come out of left field and someone somewhere will think of it first. But chances are that it isn’t you and chances are the guy sitting across the desk from you isn’t the real thing are a lot larger than the chances that he is, and if you can’t tell the difference you probably shouldn’t invest.