It slowly dawned on us that the financial forecasts we were basing the raise on were useless. It was based on information from Simon on adverts that were not real, and deals that did not exist. The financial model was broken.

I'm sorry but ... what? They ran a company for "a couple years" with at least a handful of staff, and let this one guy come in and overnight effectively take over an utterly critical part of the business even though "He hasn’t paid any of his invoices. We were expecting around £25k from him"

And then they depend on the same individual both to finance and to provide the financial forecasts justifying their must-have funding round, and after it blows up they say "we didn’t see it coming"

If you are reading this and wondering, the Simon character in this play follows a very common pattern for the "Ad Fraudster." This particular con takes advantage of two victims, a web site which thinks it can make money with advertising, and advertising networks who have excess advertising to sell.

One convinces the web site to host the javascript that will fetch ads from the network (they do that with an ads API call or when they are super bold they ask the web site to host a script that will fetch the script from the ad site and run it (yes people actually do this)) Then our fraudster drives traffic to the web site (botnets, click farms, what have you) to generate traffic and ad clicks. Which they collect from the ad agencies (and if they add affiliate tags affilliate fees) but tell the web site that it will take "90 days for the transactions to settle given everyone wants to limit click fraud."

Now depending on how much work they want to do and how much organic traffic the website gets, they can leech thousands of dollars a day off a web site. They feed fraudulent traffic in that keeps clicking on their ads, they spew affiliate cookies like confetti, and try to gather that revenue, and they sometimes "mirror" back to the actual advertiser network (taking one click on one ad and tell several networks it was a click on their ad)

And here is the sad bit, while its fraud, if the advertiser gets upset they go after the web site, if the web site is upset they go after the advertiser, if everyone starts yelling our fraudster just moves on with all the cash they have pocketed.

The problem: Reframed did the due diligence after talking to Simon and seeking additional investment.

It's also not clear if Reframed ever provided any real value, but it's clear they we're willing to take real money and assign themselves a $4M valuation. That might not be a sham straightaway, but it's probably one in the making--good intentions aside.

Your investors will rightfully blame you if you get them scammed. You're expected to be competent enough to protect them because that's part of your job as "The Management".

Thank goodness the deal stopped dead in its tracks before more people got hurt.

If you manage your receivables actively then you become aware very quickly if someone doesn't pay on time. This flushes out fraudsters, keeps you directly connected to your cashflow situation, and gives you early warning signs of any possible financial problems. These are the ways that actively managing AR mitigates risk.

It also carries a lot of upside. People who pay you regularly are some of the best people you can partner with. When someone's paid you on time for years it's a very big sign that they can be trusted (and have money!). And when you're directly involved in collecting money from those people you inevitably end up having discussions with them that are very frank and carry real stakes. If these discussions are successful that is another sign they could make a good partner.

If one of the founders at Reframed had stayed directly involved with AR on some level this story would have had a much better outcome. Simon would not have been a vendor for long. They would have found a new vendor and learned through direct experience whether that vendor could be a good partner/investor or not.

The other acronym I never let go of is HR. If I remember correctly Bill Gates was personally involved in Microsoft's first 500 hires!

We live in days that "trust" is something that you acquire after a time, not something that you suppose that others may have.

I mean, I know it's a term, but the literal meaning... If they had been diligent where/when diligence was due, all of this was evitable.

Also, they should really do some legal action on the guy. Not because of revenge, but to try to save others from future actions of the con man. Public shaming is just not so stylish.

Also, the article is written as a reminder, a warning, to not overuse commas when I type.

I agree.

Dealt with a scammer.

Told the board that he wanted to invest a fortune.

Failed to do due diligence.

The scammer failed to pay his bills or invest.

Became insolvent.

DO DUE DILIGENCE EARLY

Just goes to show you shouldn't bank on any one deal coming through. As the management of a company, its your job to have not only one deal in the works, but preferably multiple deals, so called "deal flow" or "sales/prospect pipeline". You should be in constant prospect mode, and never give any one prospect any significant portion of your time. It's not like it takes a lot of effort to just talk to people. I realize its time consuming, but what we're you guys doing in between talking to this guy? You should have been working on other deals. That way if one doesn't work out, you can rely on the others and leverage them until your own bullshit wears out.

This is the proverbial case of "all eggs in one basket".

Because if you tell employees how close to the edge you are they often run out the door, moving your odds of failure from 50% or 70% or whatever up to ~99%.

Personally, I'm a stickler for integrity and scrupulous honesty so I have never hid facts from employees even when it was dark (and for a couple of years, it was often really, really dark). But I can see why people do it: when you're in the middle of trying to close a save-the-company funding round, with 2 minutes left on the clock, losing half your team doesn't exactly help. And that did in fact happen to us several years ago: I lost almost the entire engineering team early in our company's life because they freaked out and bailed when they realized how little cash was left -- and this, in turn, torpedoed a number of funding efforts that were underway, almost sinking the business.

Again: don't take this as an endorsement of hiding the truth. But many, many good companies have been days from bankruptcy multiple times, and if everyone had known it at the time, people would have bailed out and the company would have failed. So that's why management often wants to conceal bad news from the rank and file.

When a founder concludes they might have to fight to save their company and might not be able to pay employees in X months time that's an entirely different proposition. You can be upfront with your employees and hope that they stick around. Or you can keep quiet and do everything necessary to save the company and hope the employees never need to know.

It's a gamble either way but I suspect the majority of founders opt for keeping quiet in the hope they can snatch success from the jaws of defeat.

The most difficult part of this process was the two weekends in which I couldn't share the information with them. Both times occurred on a friday afternoon after they had gone home for the weekend so I had to keep it with me until monday then immediately tell them monday morning.

The staff were always well informed, that doesn't necessarily come across in the article

Because the "dying moment" is, almost by definition, the point at which you determine you have no viable route to get new funding or restructure to keep the business a going concern. Any earlier notification to employees means that employees started fleeing ship for safer shores -- especially the most employable with the best outside options -- undermining your efforts to find a way to save the company as you lose key staff.

A) sell the ad-space to random companies B) collect the money from the advertisers C) don't pay the host

The investment scam is:

Eventually own the web site without paying for it. Risk? Low: the owners don't have any money to pursue a legal judgement. It looks like he is getting away with it.

on a side note, it takes guts to post a story like this. most people don't admit when they are taken like this. they're lucky he didn't try to steal money from them directly.

Then we later find that he has been organising events within the building and setting himself up as an investor. So he is getting people to speak up to him and pitch to him and make him feel important.

Perhaps because my business partner and I treat people equally the money he was offering had to keep going up until he felt we viewed him in an way that was important or necessary.

perhaps he was waiting for us to be unreasonable so he could have a fight and pull out dramatically and no one would have to know he didnt have the cash, but we weren't unreasonable. I hear he was already faking evidence that he had paid his other invoices he owed.

I don't really understand what his game is and he wasn't charismatic at all, like I picture a con man to be. I'll let someone else work it out and focus on building