Markets are hot. The S&P 500 sits near record highs. Venture capital funding is higher than ever before.
As hot stocks rocket upward and the best venture deals move fast, a specter is haunting investors — the specter of FOMO.
Fear of missing out has investors piling into the stocks of fraudulent companies like Nikola before they miss the rally. FOMO has venture firms writing giant checks without even the most cursory due diligence, like seeing the books or talking to customers.
This fear is the worst enemy of investors. Because we’re afraid of missing the next hot company, we gradually compromise all our standards.
Well, the price isn’t that high. This deal is moving too fast to look at the books! Surely, if so many other big names want in on this opportunity, it must be legit.
But it’s during boom times like this that frauds can hide in plain sight. And their favorite tactic to reel in suckers is to make you afraid you’re going to miss out on the next big thing.
Adam Neumann at WeWork was a master of using FOMO to vacuum up capital without diligence or oversight. Many of those investors soon lost huge sums.
Elizabeth Holmes of Theranos got giant checks from investors without them ever looking too deeply into the technology. What if they had had a team of Ph.D’s look at the device? They would have probably realized it didn’t work and would’ve saved themselves hundreds of millions of dollars.
But they never did.
And why should they? Holmes was on the cover of Forbes, for heaven’s sake! It must be real, right?
Well, we know how that turned out. If we want to avoid investing in the next Theranos, WeWork or Nikola, we have to maintain our standards.
Find out revenues. See customer contracts. Evaluate the technology.
And we need to do more diligence in a hot market, not less.
It’s hard to defraud people in a bear market. In a down market, even good stocks find few buyers. Even the strongest startups struggle to raise money.
In a hot market, it’s much easier to conceal fraud beneath thick layers of hype with a yummy FOMO topping.
But think before you take a bite.
More on markets:
Where Can We Hide in a Financial Crisis?
Will Evergrande Spark a Global Financial Crisis?
Photo: “Secretary Pritzker met with Elizabeth Holmes, Theranos Founder and CEO, and Billie Jean King”by CommerceGov is licensed under CC BY-ND 2.0
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