Investor Due Diligence and the Truth Behind Disruptive Technology

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Investor Due Diligence and the Truth behind Disruptive Technology

Scott LopezScott Lopez of the Disruptive Investor Radio joins Justin Recla to discuss the misconceptions about disruptive technology. Scott is the Managing Director of Primary Capital and talks transparently about investing, capital raising, and technology trends.

Welcome to the In The CLEAR podcast. I am your host, Justin Recla, and today we have a guest on the show that is doing some great things in the world. We met recently in San Diego at an event on podcasting and radio shows. I’m super excited to introduce you to our guest today, because we’re going to talking about industry due diligence and the truth behind disruptive technologies. Without further ado, please help me welcome, Scott Lopez, he’s the managing director at Primary Capital and host of the Disruptive Investor Radio show. Scott, welcome to the show.

Justin, super thrilled to be here, and hello everybody out there listening to the show.

Scott, I’m super excited about this because I love bringing on professionals and experts who are in the investor world. We see so much fraud and scams in the financial arena, so whenever I can come across somebody and have a conversation with them about what’s going on in the different sectors and business sectors and so forth, I’d love to pick their brain. Can you explain to our listening audience who you are, and what your expertise is, and what you do?

Yeah, absolutely. I’m an investment banker, that means I have three security licenses with the Securities Exchange Commission, series 63, 79 and 82. Basically, what my firm does … We’re a small boutique from out of New York, literally, five-minute walk from the New York Stock Exchange. I run the office out of Newport Beach, California. We raise money … We raise capital for earlier stage companies, anywhere between 1 million to 100 million dollars. The sweet spot I would say is 10-20 million dollars. What that means is that as a company needs additional financing, they will go to the capital market, or they will go to private investors, so equity or debt for an exchange or some type of return to the investors.

What’s been very helpful in that capacity is I see a lot of investment opportunities or what we say in the industry are deals, right? I see a lot of deals, early stage tech deals, medical device deals. Over the last couple of years, I also host an investor conference in Newport Beach, where companies will come and present their opportunity, their company to accredited investors from venture capital, Angel Investors, private equity, high net worth, family offices. I’m exposed to a lot of different industries, entrepreneurs, business ideas, and disruptive technology. Things that can really change how we do business today, seem to be appearing all over the place. Right?

I mean, in the news we hear about artificial intelligence. We hear about cryptocurrency, we hear about augmented reality, virtual reality, robots, drones, autonomous vehicles. E-sports, more people watch E-sports, other people playing video games than the do all of professional sports, traditional professional sports combined. It’s fascinating to me, so I decided to put together a radio show that interviews some of these entrepreneurs. What are they doing? What’s their make up? What kind of business opportunity, their market, are they chasing? What’s the solution to the problem, the big problem? Most importantly, I wanted to get investors the right checks and get involved in those industries. Right? Because that’s another side of the equation.

That’s what we do. We fund companies, and we had this radio show where we try to give some focus, and some transparency to some of the disruption we’re talking about there.

I absolutely love that, the disruptive technology industry, like you said cryptocurrencies, and some of the stuff that we’re seeing in the AI world and what not is really a game changer for a lot … Not only the world, but for investors, and how they make money, and where they’re making money, and so forth. How do you see the way how transparency has having an impact on the disruptive technology and in the investor world? How do you see that having an impact?

Transparency … A lot of it’s not transparent. Right? A lot of it is very pie in the sky, salesmanship if you’re not careful especially with the early stage company. I think what’s important is this, in an investor … In an accredited investor, that they do a tremendous amount of due diligence, which I’m really excited to be in your show because I know you really focus on being in the clear, and transparent, and having due diligence, but what I would say is if there are investors out there or people that want to get involved in certain industries, start to do your due diligence. Right?

What does that mean? If we’re talking about a capital raise, or somebody who’s trying to get more money, we want to know what’s the business model? Right? How do you get your money back? What’s evaluation of the company? What is the background of the management team? Right? Have we done the bad actor check? What milestones have they achieved in their business so far?

Justin, there are two questions that will tell you about 90% of what you need to know about a potential investment opportunity or a deal. It’s very simple. These two questions are: Number one, this is for the investor audience out here and even entrepreneurs because we may have to defend this … Against these questions. How much have you raised to date and what did you do with it? Right? Think about that. How much have you raised to date? What resources did you have? How much money have you taken in? What have you done with it?

The answers to those two questions will tell you about 90% of what you need to know on whether or not you’re looking at a viable investment opportunity that warrants further review or attention on your part. For example-

I love that.

Go ahead.

No, I said … I was going to say I absolutely love that because we’ve come across a lot of different opportunities that people have had has met and we looking at those … Two of the first things that we look at is, is how much have you raised and what have you done with it? We’ve come up across a couple opportunities that they raised 2 million dollars over the last three years and really the only thing that they have to show for it is the 6,000 square foot home that the CEO is living in.

Right. Absolutely, and that’s what’s called a lifestyle business agenda, and we’re not into investing in those. It’s a great point, but on the flip side maybe you found somebody who raised $300,000, they got a proof of concept to market, they’ve got a team behind them, they’ve got some potential customers, they’ve gone to … They’ve met some certain … Maybe FDA clearances or regulatory approval depending on what kind of business they’re in, and they’re poised for commercialization. I mean, that is something you’d probably want to get a hold of, may want to be involved in.

Yeah, and that’s a viable … That shows some forward progress. Those are the kinds of things that you need to be paying attention to.

In the disruptive technology world, in your experience how many frauds and scams have you seen? Have you seen a rise in the frauds and scams that are coming up? Are there people out there that are … Have a legit business, but they way they’re going about raising capital … How much of that are you seeing in that industry right now?

Disruptive technology, I think, is more of a category than it is an industry, but what I would tell you from early stage tech, there’s a lot of people that don’t know if it seems too good to be true, it probably is. Right? That’s number one. I would just caution everybody to … If you don’t have expertise, or you don’t have somebody that you know that you can go to who has expertise in artificial intelligence, or cannabis, or cryptocurrency, or drones, or some type of software solution then you may not be qualified to get involved. Right?

Sometimes there’s this idea of know your swim lane. Stay in your swim lane, know your role, and if you don’t have expertise why would you risk getting involved and potentially losing all your money? I mean, the landscape is littered with people who were emotionally caught up in something that they were not actually qualified to invest in.

That’s the first thing I would say. At least have some subject matter expertise that you have personally or that you know you draw upon to help you evaluate investment opportunities. In terms of … For example, cryptocurrency, right before the show, I actually don’t have very much expertise in cryptocurrency and therefore I’m not investing in it no matter how much money people supposedly are making. I’m going to leave it up to the market, and the industry to shake out. I’m going to leave it to the SCC to do some more regulation of what’s going on and then I may take a look at it later, potentially. I’m going to ask you because I know you know a lot about it.

Yeah, I’ve been diving into it a lot, just mainly because the amount of frauds and scams that are popping up over the place, the ICO, the Initial Coin Offerings that are popping up. We’re starting to see more regulation in the … From the SCC, but unfortunately there’s … Because of social media and the popularity of cryptocurrencies right now, they’re just … It’s wrought with frauds and scams. I’ve got a list of 90 some odd things that have popped up so far that are questionable at best and I either guess, see two or three new ones that pop across my preview each day. It’s really crazy out there, but I think that’s going to be true in any category that disruptive technology …

If it’s new, a lot of people aren’t familiar with the technology … We get that with just across the board in the tech sector that … You get a lot of people who don’t understand technology. They have trouble working a mouse let alone investing in a company that’s a tech company. What are some of the guidelines and rules … I mean I know you gave us two great questions, but what are some other key indicators that somebody should be looking at if they’re looking at investing in a disruptive technology?

I’ve also … I’m a big believer in that success leaves tracks, success leaves clues. There are … If you actually listen to this show, there are a couple of investors in other episodes, and I’ll throw their name out here, Cottonwood Technology Fund. That’s Cottonwood Technology Fund at Santa Fe, New Mexico. Mark IV capital. M-A-R-K-I-V Capital, Mark IV Capital out of Newport Beach, California. Those are two early stage venture capitalists that … Firms, that I work with, and I’ve introduced to the show. They’re very successful professional investors and if you go to their website, you’ll see the portfolio companies that they’re involved with. Right? They’re invested in autonomous vehicles, artificial intelligence, business models, startups that is software, retail, real estate.

One of the guys at Mark IV Capital used to run the AT&T accelerator, so he has professional experience, really knowledgeable and has written a lot of checks, made a lot of money. My friend, his name is Michael Beaudoin. My friend David Bliven at Cottonwood Technology Fund, very successful early stage venture capitalist. He writes checks between two to three million dollars for companies that qualify. They are a … They have a certain process that they go through, but here’s what’s interesting about Dave. He actually will talk and work with corporate venture groups.

What does that mean? A corporate customer, so to speak, that could potentially buy this company if it succeeds, and they have an exit strategy. If you remember Steven Covey begin at the end in mind, how does this technology … Will actually go talk to a Fortune 500 corporate venture group, get some preliminary indications that this group would buy the early stage company if it makes it and then goes to work to help them be successful and have a successful exit strategy.

I think if you don’t have that expertise yourself, there are other people out there that do. Right? The people that are listening about disruptive technology, I would say check out those two firms because they are generalists. They are invested in a lot of different companies, and they’re successful. You could really study what they do, how they do it, and act in some success tips to be drawn from it.

That’s fantastic. If you’re just joining us we are discussing investor due diligence and the truth behind disruptive technologies with Scott Lopez, the managing director at Primary Capital and host of Disruptive Investor Radio. We will continue right after this break.

To listen to the entire show click on the player above or go to the In the Clear podcast on iTunes.

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