Gems, MLM and the China Business Fixers
Scams leverage compelling misinformation and show we need to rethink our approach to business and value. We must be better.
“We take a 15% cut because the transactions are legal,” the smooth talking, bright blue suit and shiny purple shoes wearing young man said in a voice with the twang of a well practiced pitch. I took out my earbuds and continued to listen. This conversation had gone from interesting to frightening.
While I ate my lunch, the table next to me discussed the dynamics of helping mainland Chinese business people launder money internationally via “private-sale” raw-cut gems and banks in Sri Lanka. “1 Million RMB” per swipe of their credit cards. Throughout the conversation, they paused a few times to remark to each other how it’s great how this is “completely legal” and possible because of the great relationship they have in Sri Lanka.
Eventually the conversation moved on to discussing how the USA was stupid to have sold all their gold to China and that only gold bars retain their value permanently. I lost interest in eavesdropping on debunked myths about the international monetary system. I was bothered as I walked away.
Later, I joked with my colleagues about the logic of someone who is clearly helping launder money insisting that “it isn’t money laundering”. A few weeks later, the Japan power sales person reached out.
“This will be the biggest deal in the power sector, in the history of business, ever!” The sentence in the LinkedIn messages between me and the Senior Manager of some power business kept repeating in my head.
As the conversation continued, I research the company further. They are a multi-level marketing company focused on utility services to customers. Taking the conversation further, I wanted to understand how they deal with the saturation problem inherent in multi-level marketing businesses and why so many MLMs grow to a certain point and then start going into different markets or shutdown.
I was honest with my doubts, interest and concerns and he continued to respond to my questions. His responses sounded nice and included data on pricing models and splits. For each set of numbers, I sent back calculated assumptions on how many people I would need to recruit in order to qualify as a “million dollar” earner or even make a few thousand per month.
I got about ten messages deep before I started receiving boilerplate template responses, which encouraged me to “believe in myself and my unlimited earning potential”.
The model makes perfect sense for the first few people who set-up the MLM business and those who already have built large, captive networks (in essence, people who are already running their own MLM networks). For new people being “recruited” into the network, it will only benefit those people already inside.
The rule for MLM should be: “If you are hearing about the great opportunity from someone else, it’s already too late.” MLM is a great opportunity if you are setting it up.
The same feeling was bothering me again. This is a business model designed to encourage and promote people to work hard to become something which isn’t possible. The promotional materials sell a dream which is so unlikely that it can be considered impossible. The impression painted is that you can do minimal work and generate large returns. Just as the gem salesman commented, these people are not committing crimes and many (or all?) believe they are offering real career opportunities. Yet in reality it’s simply another extractive business model which creates value for the founders.
At what point does an extractive business model go so far that it isn’t ethical any more? At what point is it wrong to promote a product or service which is inflated or unrealistic? Even if people are willing to buy it. These were the questions that bothered me. The next week, I met the China business fixer.
“He brings in planes full of entrepreneurs weekly to China development zones to close investment deals in property and all kinds of ventures,” my friend explains. It’s all completely legal and fully transparent. Everyone knows who’s taking a cut where and all the contracts are signed outside of China.
I’ve just finished lunch with an old contact who met an investment “fixer” while taking a bus the other day. This businessman runs an extensive international network to find and bring people with money to China development zones. “More than 70% sign up on the first trip itself.” The conversion-rates seem absurdly optimistic. And the more he talks, the more it sounds like a hustle.
Later that same day, I met two senior people with a lot of China business experience to discuss something else. I asked them about this. “Oh, that’s very common. Most are overpricing scams and schemes.” The investor gets what they paid for (property, business ownership, etc) and normally pays a sizable premium. They may not appreciate how difficult it is to move money out of China and it may not be so simple to liquidate the investments without a local partner.
I spoke with my friend on these concerns and he wasn’t surprised. “It makes perfect sense that they will pay a premium. The money has to come from somewhere.” Two weeks later, he messaged me that it was clearly a very detailed and well structured Ponzi scheme. I’ve noticed that China seems to be a popular location for Ponzi schemes these days.
That same feeling. These business transactions aren’t right. Yet many continue to knowingly promote something that they don’t have and can’t be fully transparent about. Knowingly promoting an overpriced or impossible product or service. Or they are simply accepting that this is the way the world is. Many people could argue that many (most?) corporations operate on a similar basis to extract the maximum and minimize costs.
Scams and questionable businesses have always existed; from the origin of snake oil to elaborate junk, debt and insider trading schemes. The economic and technology infrastructure available is making such schemes even easier to promote and package convincingly. The Fyre Festival is an example of how tech-competent, ethically-questionable people can take advantage of the tools available to create a believable lie, pay for sponsors and walk away laughing.
Investors in Silicon Valley struggle with the appeal of Unicorns and those same companies challenges with becoming profitable. Did the investors in Theranos, Hampton Creek, and Uber see the business practices as unethical; did they even know what was happening? Within many startups, questionable business practices are acceptable as long as the next round of funding comes. Sometimes, these practices are necessary to meet the growth targets and expectations of investors. Everyone is looking at the opportunity of an exit at x20 (twenty times) their investment.
This part of the global business culture and the venture capital model seems broken. Short-term, cosmetic improvements to boost valuations are more important than profitability, customer-satisfaction, ethical business practices and actual value-creation. To an observer, the incentives in the market seem increasingly biased towards companies with convincing narratives and popularity over tangible value and cooperation.
The Gem Money Laundering scheme shares a lot in common with the ethically-ambivalent, return-focused startups and investors. Both are taking a risk. Both are gambling. The people involved are betting that they can make enough money fast enough that the ethics of what they are doing won’t matter. This is a side-effect of our business ecosystem which provides incentives for risky and and questionable behavior.
The risk of getting caught or failing is only bankruptcy. The upside is surviving long enough that those practices no longer matter. In the race to be first to monopolize a market, cheating becomes the path to success.
There are business in the recruitment sector designed similar to confidence scams. Hire a volume of low cost employees; mass-mail CVs and promotional materials; and cold call. In any other sector, this is called SPAM. With enough tweaking, the model consistently generates profit per employee and conversion rates less than 1%. Investors continue to invest in these companies because of the consistent, stable revenue model. The investors aren’t interested (or able) to look inside the workings of the company. Like the Fyre Festival, the marketing materials and supporters speak for themselves.
Investors look for short-term returns and companies with compelling stories seem to generate appealing short-term gains. The businesses look “sellable”. The people running and investing in these businesses don’t see them as scams or fraud. The gem seller believed that he was providing a vital, legal service to wealthy people in China. They aren’t wrong. These businesses do create value in the same way a multi-level marketing business does for the founders. At what point is that value-creation so disproportionate, we can agree that it isn’t creating value any more — simply extracting.
Elizabeth Holmes didn’t and doesn’t think she was a scam artist committing medical fraud. Travis Kalanick doesn’t think he is running a giant transportation ponzi scheme. And, I’m certain the China Business Fixer doesn’t think he is scamming the plane-loads of people he shuttles into China. Yet, we can argue that is what they are doing and this is the business culture we have created and continue to promote.
“Sell first. Figure out what to do later. Come up with a story after we win.” I’m frightened by the desire to build successful businesses at any cost.
I’m worried about the nature of business when the people I talk with about starting a business or going independent worry more about “how do I build something that I can sell?” rather than “how do I build something that creates lasting value in the world and is meaningful to me?”. Founders are strangely obsessed with controlling equity through abstract share agreements. These agreements can provide stability and can be used to trick employees into believing they have equity.
The traditional idea of building a business which is meaningful, creates value for people and is fulfilling to run, seems distant from the media coverage of startups. Instead we see a world obsessed with extraction. Businesses created to be sold. Company models designed to maximize a niche and look a certain way. Equity programs designed to extract as much work as possible without the risk of actually giving equity. Founded with a timeline to IPO or acquisition.
Rather than solving complex problems with global hunger, education, and development, we spend billions on self-destructing teen sexting. Even as young people take up new technologies, they are the most vocal critics of an increasingly meaningless, abstract, unfair world. We are more than willing to fund the ventures with the least social impact.
The Bill and Melinda Gates Foundation, the Rockefeller Foundation, Givewell.org, Impact Investors, NGOs, Social Enterprises and many others are working hard to make measurable, meaningful improvements in the world. Many startups are focused on meaningful value creation. We need more of these kinds of companies, more publicity, more coverage, more interest and more discussion.
The people who invest, run and startup companies have a unique opportunity to spend their cash reserves, profits and leverage for meaningful innovation and social ventures. The savings from technology and an increasingly consolidated world must be reinvested in meaningful value creation.
We have never had so many opportunities to solve social problems through business partnerships. I used to believe that I should “make money first” and then find ways to give back. We can measurably give back to society, to ourselves and to those around us every-single-day. We know about Google’s 20% time for personal projects. How about 20% time for meaningful social contributions?
These are choices we can all make. We can choose to be the gem salesman, the MLM promoter, or the chinese business fixer. We can chose to start an extractive business or a company focused on volume. We can choose to hold out for just a few more months to see if that next round gives us the capital we need to make the product finally work. We can choose to start doing something that creates meaningful value from the first day and every day.
Like never before, a larger portion of society, than ever before, has the ability and opportunity to chose. We should chose to use our privilege to help those without. The alternative is always appealing and always available with a visit to that bank in Sri Lanka.