Season 1,

22: Maintaining a Winning Mindset When Fundraising Goes Wrong with David Thompson

February 02, 2017

David has strong experiences in real estate investing in both domestic and international projects covering single-family, multi-family and land development. He earned his MBA in finance from Thunderbird School of Global Management, and graduated summa cum laude with a B.A. degree from Arizona State University. David spent over 20 years in high-tech management positions at Dell, AT&T, and Lucent Technologies. At Lucent he managed a $2.5B investment portfolio and raised over $1B in funds for acquisitions.

After leaving the corporate world, David started Thompson Investing and has raised several million dollars in private equity.  Most recently Dave has partnered with Ashcroft Capital and as part of the General Partnership has helped provide investor capital to purchase over 800 apartment units in three separate communities worth over $68M.

Green Flag: A Fantastic Start

In the beginning of 2016 I had my first experience in Capital Raising. I had a partner who had experience in the field and we had acquired a 300 plus unit apartment complex. It was my first opportunity to add value to a deal and I was able to do it fairly quickly. I was able to raise about $1 million in a period of 2 weeks, which surprised me a little and I think my coach as well.

In general everything was running smoothly, making me believe this was going to be a great career opportunity. The next step was for me to contact the investors to actually start the funding coming in.

Red Flag: Cyber Theft

What happened next is one of those moments in time you never forget. We had sent instructions a week earlier to the 13 investors to complete the Private Placement Document online in order to go ahead and fund the money. Then I received a simple email from my partner with the subject line “Wire Instructions”, which would explain to our investors how to send the funds to the proper place. I forwarded this email to each of our investors of the million dollars. The following week one of the investors called me and told me he was contacted by the Global Security Department of his bank. They told him the account they were trying to transfer the money to was a fraudulent account.

I went white; I know exactly where I was at my house. If this was true a total of $1 million was going to be transferred to a fraudulent account. I didn’t know how it could have happened, but having worked in high-tech operations and some pretty intense moments, the first thing I thought was “Damage Control”.

I quickly sent a very calm email out to the other investors asking them not to send their funds if they had not already since we had some new instructions for them. Unfortunately I found out that 4 of the investors had wired their funds and so were already impacted. That meant $225,000 was sent to a fraudulent account. I had to wonder how we could recover that kind of money and reassure those 4 investors. We wanted to build long-term relationships with these investors.

Black Flag: Damage Control

At this point I knew very little about fishing scams and the people who had been impacted by this kind of thing. What had happened was that the scammers had somehow intercepted the legitimate email to me from my partner regarding Wiring Instructions. They replaced it with a different email that looked similar but which contained different instructions about where to wire the money. This false information is what I received and then proceeded to forward on to our investors.

After speaking with the FBI they told us there was no way to recapture those stolen funds. That money was not ever coming back. It could have been worse; it could have been the whole $1 million. Somehow myself and my partner were able to gather and replace the $225,000 over the next week. Then we were able to reassure the 4 investors whose money was lost, that they were still invested. That was the most important thing, finding a way to make sure that the affected investors were compensated.

The other 9 investors didn’t even know about what had happened. We tried to be sure that they felt no discomfort and were shielded from the trouble. At this point their capital was totally safe and it would not have helped for them know anything about the issue.

White Flag: Future Security

Afterward, we tried to understand how this theft had happened and before we take another dime in, how we could prevent anything like it from ever happening again. I learned from the FBI that in banking the FDIC has protection for deposits but not for wires, which is very concerning. They also told us this is not an uncommon problem and that they see criminals targeting emails all the time. Title Companies are one of the big targets for this kind of scam.

Needless to say my partner and I changed the way we sent information. I would never again write “Wire Instructions” anywhere in an email and would in fact be very cautious of any sensitive information sent via email. We began to use DocuSign, our own email servers and several other safety precautions instead.

Checkered Flag: Happy Ending

I personally met with all 4 of the investors individually whose money was stolen. I explained our corrective actions and how we were going to move forward so that they were protected. I am glad to say that all 4 of those investors affected by the scam did reinvest with us in future deals.

We actually have a couple of investors now who will call me when they’re at the bank about to make a transaction to be sure their instructions are correct. We tell them to call anytime, we are fine with that.

It was a tough lesson for us to learn and very painful. But you can come back from it and I’m glad I learned it early in my career and can share with others to help them avoid the same dangers.

Failing Forward

In each episode of How to Lose Money, we ask our guests to answer a few questions about failure. Here’s what came out of this episode:

⦁ Why did this failure experience happen to you?

I don’t think we had clearly thought through the whole process and all the risks involved in handling other people’s money.

⦁ What’s the single most important lesson you’ve learned from this?

To me it is important to confront the issue quickly and make sure that whoever was impacted by the loss is assured that they are going to be taken care of. You don’t have to have all the answers right that second, just take care of their issue, reassure them and later come back with the corrective action.

⦁ How do you protect yourself from failing in this way again?

We did some research on the right steps to take and we put some better processes in place. There are many free resources that give you ideas on how to proceed with greater safety. Make sure everyone on the team follows the same process and it should be fine.

⦁ Who do you turn to when you need help?

Since I started this business I always turn to the same person. A gentleman named Joe Fairless, who I met through Bigger Pockets Real Estate. He became my coach, helped me get involved in fund-raising and showed me the best practices on how to do things right.

⦁ What advice would you give to someone in a similar position to yours?

Don’t panic, that’s the last thing you want to do. Identify the damage as quickly as possible. Reassure those who are involved or impacted but don’t give any more information than is necessary. Shield them as much as you can. You don’t want them to feel fearful of investing.

Partner with experts. Take action as quickly as possible. You can learn from the problems and come through a better person. Protect your investors. Be willing to work together as a team and turn it around. You will come back stronger for the experience.

This episode is based on an interview with David Thompson. To hear this episode, and many more like it, you can subscribe to How to Lose MoneyIf you don’t use iTunes, you can listen to every episode here.

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