The Interrelationship Between Failure, Fraud and Execution

Anyone who has been reading my articles over the years knows that I have been on a fervent mission to help develop a practicable framework for unaccredited investor crowdfinancing. One of the reasons for my vehemence is that I am a staunch advocate of “investing freedom”. It is my belief that individuals – irrespective of their net worth – should have the ability to invest their own money in any manner or in any asset class they choose. I find it absurd that a government – especially a democratic one – can dictate how its citizens spend the money that they labored to earn.

Stop FraudAlthough I am critical of government overreach, I am appreciative of those who serve to police our capital markets. I believe that regulators play a pivotal role in protecting investors from fraud. However, they have no business in shielding them from investment loss. Let me repeat. It is the government’s job to safeguard the investing public from criminals – not from underachievers.

I have many times warned of the economic perils of not differentiating between failure and fraud. Although both may trigger monetary loss, they possess diametrical characteristics. Failure is unintentional. Fraud is a deliberate act to deceive. Failure should lead to advancement, whereas fraud should end with indictments.

Failure

Failure is also inevitable. Without it, the capital markets, that fuel the ingenuity to advance the human race, couldn’t exist. Betting on a company’s success or failure is the very premise of investing. In fact, it is the backbone of free markets. If we regulate the risk out of investing, we would be regulating ourselves right out of global innovation and economic prosperity.

Warren BuffettAs utopian as it would be to have stock markets comprised of only Berkshire Hathaways or little league teams of only champions, the reality is that winners simply cannot exist without losers.  This is the yin & yang of life. Instead of wallowing in our blunders, we should be transforming those setbacks into triumphs – just like the Stoics do.

As a mom, I encourage my children to take pride in their mistakes, for they make us wiser and stronger. Some of my greatest accomplishments arose from my most crushing failures. Likewise, our capital markets were built not only on the backs of our greatest success stories, but on many corporate disappointments as well. Without those failures, there might never have been an Apple or a Google.

Unfortunately, not everyone views their failures as blessings. Some fall victim to overinflated egos. Instead of embracing their mistakes, they conceal them and get tangled up in a web of deceit. Herein lies the crossroads where failure and fraud meet.

Fraud

danger electrocutionI like to believe – probably to a fault – that people are inherently good. Unfortunately, I have learned the hard way that not everyone conducts business honorably.

In my grandfather’s day, even handshake deals were respected and kept. Today, lawyers certainly earn their keep. With business ethics on the decline, I wondered why fraud has become so rampant. Have decades of consuming processed GMO-filled food made humans greedier? Is this the behavioral fallout from a politically correct, entitled society that fails to hold lawbreakers accountable for their actions? Has competition become so fierce that we’ve simply come to expect and accept a little cheating in order to remain competitive? Have countless laws made it too onerous for today’s business owners to succeed without cutting a few corners?

Charles PonziAs I pondered the roots of fraud, I realized that there are two equally evil, yet indistinguishable, types of fraudsters: one who hatches a scheme and another who resorts to one. Although they may take different paths, both arrive at the same destination.

Did a young Bernie Madoff plan to perpetrate the greatest Ponzi scheme since, well, since social security? Or did he start out with the best of intentions, cover up a down year and then keep up with this pretense quarter after quarter, year after year – digging himself into a deeper and deeper hole? No one will ever know the true story. And because the end result was the same, it doesn’t really matter.

As my Mom says, “People will forgive the mistake. They will never forget the lie.”

While we will never be able to eliminate fraud, we can certainly mitigate it by taking responsibility for our own actions. But for those unwilling to accept their shortcomings, there is another alternative, and that is to execute.

Execution

Unlike failure or fraud, which may be more subjective, execution is quantitative. It is substantiated by factors such as increasing market share, revenue growth and customer expansion.

Deutsche Fotothek‎ Climb Rock Climber Hard ChallengeBecause it can easily be measured, execution is an entrepreneur’s most essential responsibility. And it is in this capacity where her grades count the most. There are scores of CEOs capable of inventing products and drafting business plans. However, a much smaller percentage have the ability to actually implement these plans and monetize them. This is because execution is hard. Really hard.

Nonetheless, CEOs can readily increase their odds of successfully executing simply by acknowledging their weaknesses and garnering assistance. And there is no party more eager to help them than their existing shareholders. Unfortunately, this is also the group that is most underutilized. Many CEOs spend time wooing their shareholders rather than employing them. Consequently, the problems get masked instead of resolved.

Courtney Nichols GouldSome CEOs are more exceptional than others. In conducting research for my soon-to-be-released crowdfinance book, I came across a company called SmartyPants, an organic vitamin manufacturer that raised a few million dollars through CircleUp, a leading angel crowdfunding marketplace. As a health-nut I was initially drawn to the product. But as I interviewed the CEO, Courtney Nichols Gould, I became captivated with her approach to investor communications. Courtney discussed how she provides her shareholders with frequent updates comprised of her company’s achievements as well as its disappointments. She is also not afraid to include an “ask” in her shareholder correspondence. As a result, SmartyPants receives tremendous shareholder support in the form of strategic introductions and greater access to capital.

SmartyPants’ shareholder reporting is not mandated by the government, it is voluntarily provided by a CEO who simply believes that her shareholders deserve to know the good, the bad and the ugly. If more investors demanded this straightforward approach from CEOs, there would be less deception in the markets. This concept of “Investor-commanded transparency” will be expounded upon in my upcoming book.

Regulating RiskI hope, one day soon, all investors will come to expect and receive this level of openness and honesty from the CEOs whom they invest with. But until that time, investors should always tread with caution. They need to ask lots of questions, learn the warning signs and arm themselves with information. I created the “crowd investors corner” column for this very reason. The first three articles are a good starting point for any investor.


 

Dara AlbrightDara Albright is a recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions, next-gen IPOs, P2P and crowdfinance. Albright has held a distinguished 23 year career in IPO execution, investment banking, corporate communications, financial marketing as well as institutional and retail sales. She is most known for introducing rising asset classes and crowd-structured financial products to the Wall Street community.

Through her NowStreet blog, Albright was one of the earliest voices covering the JOBS Act and advocating for greater democracy in the equity and credit markets. She produced the very first crowdfunding conference in January 2012 which was headlined by key JOBS Act architects: Congressman Patrick McHenry and Dave Weild. That event helped birth the crowdfinance movement and led to the founding of the industry’s trade and leadership organizations. In 2013, she co-founded LendIt which went on to become the largest and most recognized global p2p & online lending conference organization. Some of the most prominent figures in the financial industry as well as the legislature continue to participate in Albright’s events. Her leading-edge articles that have helped shape the direction of the crowdfinance industry can be found on Equities.com, Crowdfund Insider, Seeking Alpha, Investing.com and Business Insider. She has been featured in Forbes, ABA Banking Journal, Thestreet.com, Private Wealth Magazine as well as in a number of leading industry trade publications.

Prior firms she worked for include: Unterberg Towbin, Morgan Stanley Dean Witter, Divine Capital and Citigate Dewe Rogerson. She is a graduate of the George Washington University and holds securities industry Series 7, 24, 31 and 63 licenses.

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