It’s no secret… I love private investing.
Of course, there is the potential to generate massive gains…
But I also love private investing because it’s not all about the numbers.
To be a successful private investor you need to be able to read people… be an excellent communicator… and also be a very good detective.
Truthfully, I’m not really a “numbers guy.”
Instead, I’m more of a “curious, stubborn, opportunity-seeking guy.”
And I rely mostly on my gut instincts about situations and people.
Don’t get me wrong. My gut instincts aren’t just hunches or intuition.
They’re a combination of a bunch of small observations.
Like when you meet someone for the first time, you immediately assess the person by how firm their handshake is… by what they’re wearing… and by how they carry themselves or what they smell like.
We all develop these sorts of instincts over time, through personal experiences. Some people are better than others at making assessments of people and situations. But we all have this instinct engrained in our DNA.
And sometimes that instinct can fire a big warning signal…
We’ve all had that feeling where something just doesn’t feel right.
And that’s exactly what happened recently on a conference call between Goldman Sachs (NYSE:GS) and Ozy Media…
The Red Flags Pile Up
Ozy Media was a private startup online media company founded by Carlos Watson, who himself is a Goldman Sachs alumnus and former MSNBC anchor.
Since 2013, the company has raised $70 million and lined up an all-star list of investors, including many celebrities. Laurene Powell Jobs was an early investor, for example, providing $5.3 million in seed money.
Ozy, which considered its competition other online media outlets like Salon and Mic, seemed to start on solid footing. The company boasted content partnerships with the likes of National Geographic and the BBC, among other print and online media conglomerates.
However, questions have long surrounded the company. Most of the early concerns revolved around the actual viewership and traffic that the media company claimed to have.
For example, while Ozy claimed to have millions of subscribers on internal marketing channels, its videos on YouTube only showed several thousand views.
There were lots of other small red flags like this. But nothing alarming enough to make any investors dig too deep into the company’s dealings.
Perhaps the investors just trusted Watson’s claims and leadership.
Then… during a September conference call between Ozy Media and Goldman Sachs, everything changed.
The call was set up to discuss the possibility of a $40 million investment and was supposed to include an executive from YouTube.
However, members on the call from the Goldman Sachs team thought something seemed off.
And they were right.
Ozy Media’s chief operating officer, Samir Rao, was impersonating an executive from YouTube, in an attempt to secure the $40 million investment from Goldman Sachs.
Since this now infamous call, new allegations have emerged about Ozy Media, including:
- Untrue claims that their new funding round was being led by Google Ventures.
- That Ozy’s $5.7 million in federal PPP loans never made it to its intended destination — the company’s employees.
- Supposed investments from major celebrities, like Ozzy Osbourne, who never even knew of the company.
- Company employees coming forward to share stories about a toxic and fraudulent internal culture.
As serious and incredible as all of these issues are, almost all of them could have been discovered with relatively simple due diligence by investors.
Be Like Columbo
Let’s go back to the viewership numbers: what Ozy was reporting versus what we can see on YouTube itself.
Sure, glitches happen, and the count could have been off. But how often does that really happen?
That first red flag should have been a stop light for any new investor.
However, many new investors (and even some veterans) assume that “little” issues like this must have been noticed by other investors. And if other investors are OK with these discrepancies, then everything must be fine.
Of course, what is actually happening is that all of the investors are all leaning on — depending on — each other…
And that means that all of the investors are making the same dangerous assumption.
When investing in private companies, you can’t depend on other investors or federal regulators or anyone else. You have to do your own research… or else you can get burned and lose your entire investment.
Yes, it’s harder with private companies. Private companies don’t have to disclose financials like publicly traded ones do.
But just like with Ozy Media, a simple search can still give you the information you need to move forward… or not. Any 12-year-old could have looked at Ozy’s claims and at its publicly displayed YouTube viewer count and caught the problem.
The same can be said about Ozy’s claims about their “celebrity” investors. Any new investor should demand proof. Ask for some documentation… or for a video of the celebrity publicly stating that they are backing the company. Really, anything to verify that such claims are true.
And that’s the thing… it’s easy to get swept up in the excitement of a new private opportunity. The fear of missing out (FOMO) surrounding hot, new startups can cloud even the savviest investor’s eyes.
But if you stick to simple detective work, you can usually uncover much more than you’d ever think.
It’s important to trust your gut.
If you have questions, get them answered.
If something doesn’t feel right, it probably isn’t right.
Don’t be afraid to be “the person that asks uncomfortable questions.” Be like Columbo and always be asking, “just one more thing…”
You’ll end up saving yourself a lot of money. (And you might save other investors’ money, too!)
Bottom line: Don’t invest a dime without doing your due diligence.
On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.