Gavin Woodhouse is the latest entrepreneurial figure to make a very public fall from grace amid allegations of fraud, very serious fraud. It should be noted, however, that the legal action taken against him so far (to July 2019) has all consisted of civil suits raised by investors and that he strenuously disputes the allegations of criminal wrongdoing. With that in mind, instead of covering old ground and summarising information which is already widely available in the mainstream media, it may be more interesting to look at what lessons investors can learn from the situation.
Lesson one – Be very wary of celebrity endorsements
There are all kinds of reasons to be wary of celebrity endorsements. First of all, there is the cold, hard fact that endorsements can be financially motivated. Influencers of all descriptions are supposed to make it clear when they have a beneficial relationship with a company (even if they have not actually received cash payments from them). Ironically, however, the new emphasis on disclosure may have backfired somewhat and inadvertently created a situation where some influencers continue to ignore the rules (usually discretely) while other influencers over-disclose to protect themselves. This can make it very difficult for investors to work out to what extent, if any, an influencer’s endorsement is sincere. Secondly, even if an influencer’s endorsement is both sincere and made with the best of intentions, they may not be qualified to make a properly-informed judgement on the matter. They may have had a great experience with the product, service, person or business themselves, but that does not mean that other people will. Thirdly, endorsements can be either manipulated or openly faked. A famous (and admittedly entertaining) example of this comes from the film Legend, which received a two-star review from the Guardian but the film’s promotional material made it look as though the stars were continuing behind the head of lead actor Tom Hardy. Less entertainingly, however, there is really very little to stop people from claiming endorsements from famous names, be they individuals or companies. If the individuals in question find out, they may be able to take action, but they may not, especially if the company simply apologises and takes down the claim.
Lesson two – Look before you leap
This holds true of even blue-chip companies and arguably holds even truer of “alternative” investments such as those on the AIM or those made directly to entrepreneurs such as Gavin Woodhouse. If a company has audited financial results, then as a minimum you need to familiarise yourself with them. If a company does not have audited financial results, or at least, not for an extended period of time (as in at least three years), then you need to look for alternative means of verification for any claims made by the people behind it and it’s also strongly advisable to proceed with extreme caution in any case. Always remember that investment carries risk and that start-up and fledgeling companies often carry a relatively high degree of risk, even if they are backed by people with solid track records. Take that into account when deciding how much of your investment funds you are prepared to allocate to them.
Lesson three – Keep a close track on your investment’s performance
Again, this holds true of all investments, but particularly true of “alternative” investments. It is generally a very bad idea just to “set and forget”. You should have a clear idea of what you can expect in what timeframe and if those expectations are not met, then either the company needs to give you a very compelling idea why not or you need to take action (or both).