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I’d been putting-off going to startups.cringely.com to finally read all 286 entries so far in this summer’s Cringely (NOT in Silicon Valley) Startup Tour.  But when I finally went to the site, I couldn’t get in.  The page timed-out.  This was not good.  Or maybe it was very good in that the site was so busy.  But even that’s not good because I don’t like turning readers away.  So which was it — good or not good?

Not good.

Twelve hours later, when I still couldn’t get in I called the CTO at the company that hosts that site — Democrasoft.  You haven’t heard about them, believe me, and I’ll explain why below.  But they weren’t having any trouble seeing the site.  Nor was I having trouble seeing it on my iPhone, or using my Verizon MiFi cellular access point.  It seemed to be a problem with my home ISP — Comcast.

Twenty minutes on the phone with Comcast tech support found the problem, though not the solution: the server IP address was blacklisted by an outfit called SORBS (Spam and Open Relay Blocking System) that claims to keep track of mail servers run by spammers or compromised by computer crackers.  Of 105 such blacklists available, only one — SORBS — listed this IP address, which wasn’t even for a mail server!

That IP was part of a block of addresses owned by Amazon Web Services, with the entire block listed by SORBS as suspect.  So Comcast (only the eastern half of Comcast, I later learned), tending to believe SORBS, blocked the address and Cringely’s (NOT in Silicon Valley) Startup Tour from tens of millions of subscribers.

The suspect IP address may have been used previously for another machine that was a mail server or maybe a compromised web server.  It has only been startups.cringely.com for a couple weeks, after all.

I’m amazed to learn that as rigorous an outfit as Amazon Web Services doesn’t check its IP addresses for blacklist status before reassigning them.  If I were an AWS customer I would be upset.  Since I’m freeloading I guess I’m just a little miffed.

We’ll sort this out shortly, I’m sure.  The guys at Democrasoft have lodged a protest with SORBS, but I am not very confident that will accomplish anything quickly.  Better to make Amazon assign the server a different IP address.

If you are having trouble reaching startups.cringely.com as a result, try it from a computer with a different ISP.

In the meantime, what is this Democrasoft?  Well until a moment ago it was called Burst.com, a little company from Santa Rosa, CA that I wrote about years ago over and over when they were fighting Microsoft and then Apple in court, winning both cases.  Burst was involved then in the efficient distribution over the Internet of video and audio streams and I suppose they continue to own and license patents in that area today.

A few months ago the folks at Burst called to tell me they were changing direction, creating a new kind of web service designed to help groups explore issues and make decisions.  The called it Collaborize.

Startups.cringely.com, if you can get to it, is a custom instance of Collaborize dedicated solely to the nomination, discussion, and evaluation of startup companies.  Not even a beta, I’d say my site was alpha software, but I was intrigued by the concept, trusted the people behind it, and who can turn down free service?

Collaborize was formally announced this week at the Demo conference in Palm Desert.  I wasn’t there but from what I hear the product was well received with attendees seeing all sorts of interesting ways to use it.  Have a look and let me know what you think.

That is if your ISP will let you.

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The Mel Brooks movie, then Broadway musical, then a movie of a Broadway musical The Producers are the only such dramatic works I know of that were based primarily on a business model.  The plot is a simple scam in three acts: 1) most Broadway musicals fail; 2) greedy investors in Broadway shows want a lot of equity for a little money, and; 3) since the show is likely to fail anyway, why not produce a deliberate turkey but make money (strictly for the producers) by selling 500 percent of the stock?  Nobody will know they’ve been scammed because a deliberate failure will never pay any royalties.  Except, of course, Springtime for Hitler was an unlikely smash hit. Well similar events take place in technology startups every day, though usually without the smash hit.

I believe there is a lot of fraud in high tech startups, 95 percent of which fail.  With only a five percent chance of surviving, startups face a gauntlet of risks as described in this quote from uber-VC John Doerr in my show Nerds 2.01: A Brief History of the Internet:

“There are four categories of risk to look for in every project:

1) “People risk: How the team will work together.  Because inevitably one of the founders does not work out and drops out.”

2) “Market risk: This is an incredibly expensive risk to remove.  It is about whether the dogs will eat the dog food.  Is there a market for this product? You do not want to be wrong about market risk.”

3) “Technical risk: This risk we are quite willing to take on.  Whether or not we can make a pen computer that works, be the first to commercialize a web browser, or split the atom if you will.  That technical risk is one we are comfortable trying to eliminate or take on.”

4) “Financial risk: If you have all of the preceding three risks right (people, market, and technical), can you then get the capital that you need to grow the business? Typically you can. There is plenty of capital to finance rapidly growing new technologies that are addressing large markets.”

Of course Doerr completely forgot to include fraud risk — that investors would simply have their money stolen.

You see sometimes the founder’s a schmuck.

Tech fraud happens all the time and those who are fooled include the most sophisticated investors (big shot VCs are not at all immune).  Last year alone there were a pair of fraudulent startups uncovered that cost their investors more than $50 million each.  Just think of the many frauds that aren’t caught or that are hidden in the books of VC firms, forced to merge into healthier portfolio companies to obscure the shame.  Where’s the fiduciary responsibility in that?

Large or small, fraudulent startups all follow The Producers model — they count on the greed of their investors.  Often there is a premise that makes no technical sense but sure sounds good.  Take a flying car, for example: one of those has been raising money from private investors for almost 30 years with no return in sight.  Why do people continue to invest?  It just sounds so cool.

Rule #1: If it requires exceeding the speed of light for any reason, the business is probably a scam.

Investors in startups are supposed to be “qualified,” which under the Securities Exchange Act of 1934 means they are sophisticated investors with substantial assets — so many assets, in fact, that there is no need for society to protect them from fraud.  That hardly describes Aunt Susie after she cashes-in her 401K to invest in your perpetual motion company, does it?  Yet Susie gladly signed her stock purchase agreement which said she was prepared to lose it all.  And she did.

Rule #2: Only invest in startups money you can truly afford to lose, because you probably will.

Due diligence is the process of an investor checking-out a possible investment. Is it really a good deal?  Is the price right? Where does the opportunity sit on John Doerr’s risk list?  Few individual investors, however, actually perform due diligence.  They invest based on gut feelings and by reading documents sometimes created out of thin air by company founders.

Several years ago I lost what was for me a substantial amount of money investing in a financial patent startup.  It looked great on paper, the only problem being that the paper was forged, simply made up.  Nothing was as it seemed.  The company’s books literally didn’t exist. So I sued, spending a lot more money, only to have the founders declare bankruptcy and walk away.

Rule #3: Don’t invest in something you don’t fully understand.

Giving engineers the benefit of the doubt I’d guess that 10-15 percent of startups are fraudulent to some degree.  Some are outright scams while others are more misadventure — idiots playing with other people’s money.

If this is the case, then it surprises me that there aren’t many (any?) third-party companies that assess risk for private investors.  A friend of mine once almost bought a web company that was a market leader with ever-increasing traffic, it seemed, no matter what the economy.  Then it turned out those great numbers were guaranteed by a “black box” generating spoof hits as-needed.  Advertisers were paying for those phantom clicks, and getting nothing for their money.  Who uncovers activity like this?

I’m thinking maybe I will.

I’ve been thinking lately of offering an advisory service for potential investors in privately-held technology companies, analyzing in each case the five — yes FIVE — kinds of risk to see if that good deal really is good.  It’s not that I am so smart but that I have very smart friends whom I can bring-in to do the real work.

Now what to call this new business?  Maybe Chance-in-Hell.com, as in “Does this investment have a chance in Hell of succeeding?”

Or maybe Springtime for Cringely?

I like it.

What name would you choose?  And what stories do you have of fraud at technology startups?

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Headed this week to the Grand Canyon in our old Winnebago RV (now minus mice, we think) Mary Alyce, the boys and I stopped outside Kingman, Arizona at this place, freshjerky.com, managed by Gus, whom you’ll find pictured below, handsome devil that he is.  And that’s Mary Alyce taking pictures of the boys in the Freshjerky parking lot at left.

Just as the sign says, Freshjerky has a limited product selection — various kinds of meat jerky including buffalo; honey (minus “expanders,” whatever those are); olives; nuts, and cold drinks.  Everything is very good for what it is and nothing is particularly cheap.  Nobody goes to Freshjerky, for example, to buy cheap jerky.  That’s why God invented truck stops.

But Freshjerky is a terrific example of American enterprise and how easy it can be to find a niche in our enormous and varied consumer economy.  I found it hard to believe at first that people would really be drawn to such a place (Mary Alyce is the jerky fan in our family). And from one look at Gus, handing out tiny bites of cowboy jerky to lure customers, they aren’t drawn by his innate sex appeal.

So how is the company doing?  Just fine, thanks, though most of the sales are online — about $2 million per year.  The recession has had no significant impact yet on Freshjerky sales, according to Gus.

This is, in a way, a story similar to Parrot Secrets, which caused such a furor in this space a few months ago.  Freshjerky is perfectly mundane. There is nothing Gus does that any of us couldn’t do as well — nothing.  But he’s the guy selling $2 million per year online from a quarter acre beside the highway outside Kingman, Arizona, and we aren’t.

Heck, if Gus can do it why can’t we all?

Well we can.  And in the current recession, as more jobs are lost and people become desperate for work, more of us should try channeling our internal Gus.  We could make our own declarations of indendence by coming up with our own something good to sell.