If it sounds too good to be true – it is

I’ve received a series of comments from Ken Pedlar on some recent posts, and decided in the end to approve them for publication, removing any personal details such as phone numbers.

I’m excerpting from the latest comment below, which was in response to the the post on Xero valuation. I’m doing this and commenting on it to show how to avoid making the very poorest investment decisions. There is much in the note which should cause any reasonable person to never reply, but it is worth going through why it triggers investor instincts to run a mile.

The comment

“How would you go about estimating a value for a new Wingless Vertical Takeoff & Landing Pico–come Microlight/Ultralight Craft scalable to immense size. Craft will use latest lightweight high tech permanent magnet electric motors controller energy storage cells etc plus miniaturized avionics autopilot, infrared night terrain scanning equipment etc. Two craft one capable of carrying 50kg and a manned unit carrying 200+ kg craft. , Both to be constructed over 6 to 9 months and the whole process videoed in documentary style and fed direct via a pay per view site to the net to raise money to repay initial funder. Upon maiden launch and info being sent to certain long interested parties I am absolutely confident of raising several billion for forward order. As inventor of the globally patented Inertialess Drive Rotor and multiple green tech developed from it and having done a successful launch worldwide of my previous company with a handful of people while engaged in a convoluted war with racist idiots in the corrupt SEC. They becoming engaged after nasty pathetic niggling shareholders made four anonymous complaints to them of which the ensuing public warning notices literally destroyed the company. Thus I do have the necessary experience to go global real quick if I can find a couple of guys like yourself who are smart enough to come to the party part fund an expert engineer/physicist/entrepreneur to the tune of $100K to get the two prototypes built over the next few months in the run up to April first whereupon it becomes legal to raise funding without a prospectus using the crowdfunding format. I could certainly teach you guys a thing or two and also am willing to learn for your ample expertise. Know also I am well know throughout the fortune 500′s and upper echelons of scientist, engineers, and royals the world over and have powerful above top tier people. I require one or two person who can be trusted to front me my name having been tarnished by the SEC and a few of the nasty petty shareholders who have been blocking my access to funding. All I ask it you come and help me an I can assure you I can and will make you a very very wealthy man in return. My interest is the craft as I don’t need money once I have these for my family. I have 12 kids and a heck of a lot of grandchildren. Should you decide to help please come talk to me or at least call me, I only bite on Friday’s. LOL. Ph..”

The Issues

Let’s walk through the issues:

1: a new Wingless Vertical Takeoff & Landing Pico–come Microlight/Ultralight Craft scalable to immense size”

This sounds similar to Martin Jet Pack, and their company is 9 years old and they have yet to make a commercial sale. So from an investor perspective this points to years of funding over multiple rounds, a lot of work with the company and the founder personally. So the idea and founding team had better be credible.

The “scalable to immense size” triggers less than credible physics warnings.

2: Two craft one capable of carrying 50kg and a manned unit carrying 200+ kg craft. , Both to be constructed over 6 to 9 months

The timing to construct two aircraft seems very unrealistic given the Martin Jetpack experience. Moreover it is now clear that this investing into an idea only, and not into a company with a tangible prototype or paying customers.  That’s a good way to sink a lot of money over multiple rounds.

Meanwhile there are at least three aerospace companies in New Zealand that have advanced prototypes, including a Composite Helicopters, a fixed wing player who I am not sure I can name and Martin Jet Pack itself. All of these are perhaps seeking investment.

3: the whole process videoed in documentary style and fed direct via a pay per view site to the net to raise money to repay initial funder.

This raises the question of what the investment is for – a documentary or an aircraft? Very few people could point to a successful track record in either, and certainly not both.

4:  I am absolutely confident of raising several billion for forward order. 

This raises the concern that the writer is not realistic in his expectations. If it were remotely true then funding would not be an issue. If the founder had a track record of attracting such orders then this could read differently, but we would expect to see evidence for the same.

5: globally patented Inertialess Drive Rotor

This raises the question of patent validity. I searched and found this.

However that search raised lots of questions. There is the failed delivery of any products from the company that owned the patent, which calls into question the usefulness of the patent. If everything else checked out (it does not) I would unleash a professional, such as Kristian Slack, on this field to determine just how interesting the patent is before going any further.

I also searched on the term “patented Inertialess Drive Rotor“ and the results are not good. The third result is from Crank.net, the second is titled “Is this possible” and the first says someone did a search and turned up nothing. The fourth result is a Youtube video with surprisingly readable, and negative, comments about the former business.

The phrase itself screams “fake physics”, in the same category as “frictionless” or “perpetual motion.”

6: having done a successful launch…. while engaged in a convoluted war with racist idiots in the corrupt SEC. They becoming engaged after nasty pathetic niggling shareholders made four anonymous complaints to them of which the ensuing public warning notices literally destroyed the company

This raises the first question of why the previous company failed if the launch was successful, and secondly on what actually happened to the investors in that company from their perspective, and thirdly on just how hard the founder was to work with.

However the real issue is that the way the investors and regulator are referred to in the comment, as even if their actions were poor (and I doubt it very much), the rant reflects very poorly on the founder’s ability to work with anyone in the future.

7: Thus I do have the necessary experience to go global real quick if I can find a couple of guys like yourself who are smart enough to come to the party part fund an expert engineer/physicist/entrepreneur to the tune of $100K to get the two prototypes built over the next few months in the run up to April first whereupon it becomes legal to raise funding without a prospectus using the crowdfunding format. 

This raises the question of whether the founder understands and has learned from the lessons of the catastrophic failure of the previous company. It also raises the question about the expectations of the founder for being able to build two prototypes so quickly, with such limited funding. I would expect to see prototypes that are built using more time and less money before investors are approached at all. Given the challenging physics above it seems that an actual product would never get off the ground, as it were.

However this raises the very deep and problematic question of the prospect of this  proposition being offered to the public through a potential law change. How will we prevent major losses of funds for investors if crowd-funding becomes law in New Zealand? It also calls into question whether we should even allow the law in the first place, which is sad as it could deliver substantial benefits.

8:  I could certainly teach you guys a thing or two

This raises the question of whether the founder is a collaborator, and can learn from advisors and experience and can write in a way that does not make people angry.

9: and also am willing to learn for your ample expertise

This raises the question of whether the founder actually could learn from others.

10: Know also I am well know throughout the fortune 500′s and upper echelons of scientist, engineers, and royals the world over and have powerful above top tier people.

This raises the question of why they and others are not investing.

11:  I require one or two person who can be trusted to front me my name having been tarnished by the SEC and a few of the nasty petty shareholders who have been blocking my access to funding

This raises the question whether the founder is looking for people who to convince to give him money based on a process or evidence that the SEC and former shareholders would be very uncomfortable with.

It also raises the question of what actually happened, and a quick search reveals that the SEC (now FMA) had a warning in 2001 about an illegal share offering. The notice also states that there is a long history of treating with public investors without the necessary legal processes and documents :

“The Commission had previously, in 1998, banned advertising for shares by Inertialess Drive Technologies (1995) Limited (now liquidated) because there was no registered prospectus. In 2000 the Commission also banned advertising for shares in Inertialess Drive Corporation Limited for the same reason. Mr Pedlar was involved in both these companies. The advertisements in the Bay of Plenty Times are targeted at former shareholders of these companies.”

It raises the question of whether the founder has good legal advice, whether he would take good legal advice or whether any good legal advisors would work with him after this track record.

12: All I ask it you come and help me an I can assure you I can and will make you a very very wealthy man in return. 

This raises the question of inflated investor expectations, leading one to believe that the founder is targeting unsophisticated investors, a real issue in early stage businesses in NZ. Investors in this space should know exactly what they are getting into, and sadly many do not. Angel clubs can help educate investors, but there is no substitute for full time professionals on the job.

13: My interest is the craft as I don’t need money 

This raises the question of credibility, especially as a search finds this Bay of Plenty times article about Pedlar raising $6.8 million from local investors and then disappearing. The key quote:

“Mr Pedlar moved to Switzerland following a shareholders’ meeting in Tauranga on February 24, 2000. By the time the company was put into liquidation, he had left behind more than 1200 shareholders, most of who lived in the Western Bay of Plenty.”

Again this raises the question of his own motivation and ability to deliver value to investors. It also raises the question of what he told the investors, 1200 of them, in the 2000 fund raising process.

In Summary

Some people prey on our vulnerabilities to take advantage of us, using things like greed and dishonesty to capture us into an elaborate confidence trick. It may not be planned or even deliberate, but the general rule when confronted with something new is worth putting in lights:

If it sounds to good to be true, it is

There is plenty in the above pitch that makes it obvious to any reasonable person that the investment is best stayed well away from.

Which makes it even more upsetting that so many people were caught up as “investors” in Pedlar’s prior company, Inertialess Drive ZPE. More than 1200 shareholders gave a total of over $6.8 million to a business that was flimsy at best and arguably fraudulent at worst. Let’s quote from the Bay of Plenty Times again:

Mr Richards said he was struck by how the factory looked like the set of a B-grade movie, with people in white overalls milling around like extras, with nothing really happening.
He asked Mr Pedlar how business was going and was told that the company was working with General Motors on a deal worth billions of dollars.

Astonishing. Those investors were targets of a scam at worst and victims of an illegal investment (no public prospectus) at best. It would appear that they did not make their decision based on well-informed robust analysis, they did not do proper due-diligence on the company and they did not “invest in what they know”. They broke the basic rules of investing in early stage companies, and as a result all early stage companies will look risky to them.

But I don’t believe that early stage investing is necessarily risky, but like all investing it should be done on the basis of good information and understanding. The first step is to avoid any stories that are too good to be true.