# TelexFree — A quick business case assessment

Ever wonder why fund managers can’t beat the S&P 500? ‘Cause they’re sheep — and the sheep get slaughtered. I been in the business since ’69. Most of these high paid MBAs from Harvard never make it. You need a system, discipline, good people, no deal junkies, no toreadores, the deal flow burns most people out by 35. Give me PSHs — poor, smart and hungry. And no feelings. You don’t win ’em all, you don’t love ’em all, you keep on fighting . . . and if you need a friend, get a dog . . . it’s trench warfare out there sport and in here too. — Gordon Gecko

I built a much better model with more realistic constraints available here

Outside of generating new information or product, risk, diversity and time horizon are only variables I’m convinced an investor can control. This means invest broadly over long time horizons and keep taxes and expenses low. If you want outsized returns, you must take on more risk or make something people want to buy. Most wealth is created by businesses making real products, but wealth can still accumulate from appreciating assets (real estate, land, gold, internet domain names, etc). However, both these methods take a lot of time and effort. Can you make a lot more quickly through selling VOIP services, posting internet ads and joining a Brazilian-focused multi-level marketing (MLM) club called TelexFree?

Over Christmas break this business came up for discussion and caused a lot of confusion. Is this a business? An investment? Either way, what is the basic product and what is the associated demand? And finally, what is the downside risk?

The basic value proposition is straightforward. You put in a fixed amount of money, post internet ads, sell voice over IP telephony and recruit new members. From this you receive multiple cash flows which quickly return your initial investment: bonus incentives for bringing in new recruits into the system and some fractional return of telephony services sold. However, from the company and its members there is almost no discussion of the underlying supply and demand of the business and the whole value proposition quickly becomes . . . the return! The cash flow kept getting all the emphasis, not the product. This post is to get at the question: is there a population ready to pay real cash for a product they want and no one else can give them, or are a whole lot of people getting scammed?

The complexity of myriad cash flows initially obscured my ability to get to the core of the business. The different services sounded like an odd mix. What exactly are “internet ads”? What telephony services could provide high MLM overhead and still compete with Google Voice, Skype or international rates from major carriers? VOIP services in particular benefit from very large scale with a small non-recurring infrastructure, all based on leveraging the very low cost of internet bandwidth. I can’t think of anything with thinner profit margins, except for perhaps internet ads, which tend to cost from a fraction of a cent for a page view to around several dollars for impressions which lead to a sale. In fact, VOIP is pretty much a buzz word. Almost all telephony is at least partially carried by VOIP today.

So, bundle two very low margin businesses and add in a high upfront cost for membership and you get a business? Something didn’t seem right. In particular I wanted to know: (1) is there a legitimate telephony business, (2) is there a legitimate internet marketing business and (3) how can the initial membership fee produce such an insane return (roughly 300{aaa01f1184b23bc5204459599a780c2efd1a71f819cd2b338cab4b7a2f8e97d4} per annum) in a sustainable way?

Again, the math is revealing. In order to produce an annuity that would return 20 per week on \$300 present value, you would need to be guaranteed a 6.5{aaa01f1184b23bc5204459599a780c2efd1a71f819cd2b338cab4b7a2f8e97d4} weekly return, or an annual return of 247{aaa01f1184b23bc5204459599a780c2efd1a71f819cd2b338cab4b7a2f8e97d4}. Unsolicited internet ads can be posted by bots for fractions of a cent, so there is clearly an external source for funding the AdCentral payback. There are only two options for this: new memberships (aka Ponzi profits), or profits from VOIP sales which have a niche, but legitimate product. # Membership Warning, I probably get this section wrong. The membership specifics seem to change, the information seems correct as of several months ago, but some current sites have the same idea but in different formats. TelexFree advertises itself as a MLM pyramid compensation plan (one that increases upstream compensation). For TelexFree, the pyramid takes the form of a binary compensation structure to pay out commissions on the recruitment of new members and their payment of membership fees. A binary compensation structure starts with you at the top and branches out into two legs. The first two members placed in your binary compensation structure form the basis of two teams (your “left” and “right”) which have to be balanced for payout computations. You have to recruit the first two new members in order to qualify for TelexFree’s binary commissions but thereafter any new members recruited by those below you are in your downstream for commissions. The first of the binary commissions paid out by TelexFree is a flat 40 cents a week commission per member under you (regardless of which side they are on). This is a recurring reward. The second binary commission offered is based on the pairing of new memberships on both your left and right binary sides. For example, if you recruited 6 new members and 3 fell on your right team and 3 your left, you’d earn a \$60 (3 * \$20) paired binary commission that day. If however, you have more on one side only the lesser amounts match up. Paired binary commissions are capped at 22 cycles a day (\$440), you will see why later when I do the math.

This is a brilliant strategy by TelexFree as it creates an incentive structure to get both sides to match and aggressively recruit.

# Long Term Prospects

The fundamental reality is that when you don’t have a product or service with an active demand that is the foundation of your business, the money is going to disappear, it is just a matter of time. The trick for the owners/founders is to quickly convert their earnings into accounts which can’t be clawed back. As long as leadership can create enough confusion regarding where the money is coming from and keep the money coming, they can keep the whole system in place while they increase their overall take. Regulatory bodies are slow to act and schemes such as this can take years to work their way through the courts. In that time, the owners can keep turning out new products to keep their “investors” thinking the business is going to take a new direction and the money will not dry up. The brilliance of a combined ponzi and pyramid business structure is that if you start early, you are going to make a lot of money for a good period of time.

If you search the internet for TelexFree there are 1000s of You Tube videos mostly filled with a discussion of the compensation scheme and reiterated emphasis on the fact that the money is flowing. The issue is not wether payouts are occurring, but if there is a sustainable (“real”) business that is unique and better than the competition. Since any potential legitimate business TelexFree might be engaged in are in the highly competitive, scale advantaged, and highly automated VOIP and internet advertising business, I’m not surprised there is no technical or even economic discussion of a viable business model that I could find anywhere on the internet. So let’s turn to math to make this more concrete . . .

# Simulation

In order to make this real, I’m created a financial simulation to show how this system works (email me if you want the spreadsheet). In reality, there are a lot of complications that slow things down for the member and I’ve left out a lot of the details, but I have enough in the model to show how the system works for three different categories of participants: owners, winners and losers.

If you assume you buy one membership (\$299) and that you are able to recruit 1 out of every attempted 20 sales and you try to sell TelexFree to 10 people a week, then you will (on average) sell one membership every two weeks. If you assume your recruits are this successful as well on both your left and right at equal rates, you will break even in 11 weeks and start making a profit (with \$30 in your pocket!). At this point, there would be about 20 people in your binary. Also, assume you sell one VOIP plan every 10 weeks and 1 out of every 100 new members downstream buys a VOIP plan. At this point the company has made \$5,971 in membership fees off of you, but is committed to paying \$420 a week in AdCentral fees. Not bad deal for them, and it is about to get a lot better!

If you fast forward with these assumptions to the end of the year (everyone you recruit, recruits 1 person every two weeks), things start to get crazy. At this point you have made a lot of cash, you are now up \$63,000 (and getting \$216.76 in downstream VOIP commissions and the absolute max of \$3,080.00 in weekly membership commissions) and TelexFree has now grossed \$65,622,212.40 from you and your downstream memberships alone. Your downstream has grown to 218,951 people. Without their \$440 a day cap you would have made many millions by now. However, TelexFree now has weekly commitments to pay \$4,379,020 a week in AdCentral fees. If growth doesn’t increase the company can get by for 15 weeks before 209,324 members lose an average of around \$250. Clearly, this would have been an exciting ride and you would have pocketed enough cash for a nice car or down-payment on a house, and odds are that you will never meet any of those poor 209,324 people, since (in this simulation) everyone four levels down from you still profited. Naturally, very few telexFree members would recruit a new member every two weeks. In reality, people buy numerous memberships and go “all in” and the majority of new recruits never recruit anyone, which causes the same effect except with a smaller pool of people to share the risk. (This means a lot less people are going to lose a lot more money.) Despite the generalizations I’ve made, this should be a good peek at the dynamics of the system: the owner makes roughly 1000 times what the most profitable members make and those at the top do very well. The rest pay to play. The big difference is that the owner knows when the game is up and has had time to protect their earnings. # How will this play out? There are only two scenarios for an endgame of this scenario for US TelexFree participants: (1) the system collapses and payouts cease (cf. Zeek Rewards) or (2) The US Department of Justice bans TelexFree operations in the US (which Peru and Brazil have already done). see this warning posted last week Right now the race is on. If this plays out like previous Ponzi collapses have, TelexFree will have to turn over all of their electronic records. The owners will declare bankruptcy and turn to laundered cash. If participants have benefited substantially, their earnings are subject to clawback (the government will require you to pay back your earnings) and the goverment will have your exact compensation on their subpoenaed records. If you have been/ or are a participant, I would set aside your earnings in a separate account and wait to see how this plays out over the next several years. Unlike the owners, you are clear before the law as long as you pay back your earnings if required (assuming you have claimed all earnings on your taxes). You can see through this Google trends report that TelexFree interest has peaked and is in a significant downtrend. Looking very similar to ZeekRewards several years ago. If you are wondering how to go forward and if you should trust me, I strongly recommend that you don’t. Ask the hard questions: Is there a fundamentally unique product or service? Do the math yourself. Just don’t get greedy and follow the herd, because the sheep get slaughtered. # Some Press I built a much better model with more realistic constraints available here ## 39 thoughts on “TelexFree — A quick business case assessment” 1. Herbert Santos says: Hi, Tim, great arcticle on Telexfree, could you send me the spreadsheet you made? • tim says: sure — but I need to get it from my computer at home (I’m currently traveling.) • Quique Pineda says: Hi, Tim, thanks for this write up on Telexfree, could you send me the spreadsheet you made please? I would love to see it. Thanks! 2. Renato says: Brazilians are completely crazed by this company. After the government blocked the activities of Telexfree in Brazil, many people continue posting ads via Telexfree U.S.. They do that through anonymous web browsers that fail to identify the IP address of the computers located in Brazil. 3. Thank you Tim. You’ve managed to give a plain-language explanation for something specifically designed to HIDE the realities of what is going on here. And the problem is that the participants don’t want to hear this, and can’t afford to believe it. The ones in the middle and top are terrified that the tap will be cut off if people listen to messages like this, and the ones that just got in are terrified they won’t make their money back if you are right. Classic result, no one involved can afford to believe you, so you must be lying. Unfortunately, the numbers don’t lie, and it’s just a matter of the clock running out. 4. Hello Tim, I just finished reading your article and I consider it an outstanding source of information about the real deal with telexfree. Two questions, 1) Can you forecast how much time telexfree has till it collapses? 2) Can you allow me to translate this article into Spanish? Thanks! • tim says: Sure — please translate into Spanish and I’m happy to post it here. On your first point, I’m unable to forecast how much time it has until it collapses, because they are diversifying into new foreign markets and so their maximum potential population is hard to forecast. I think the best thing to do would be to look at analogous Ponzi schemes. In a discussion with a US financial crimes investigator, while it is clear that this business is a Ponzi (and Pyramid) it can be hard to shut these down until you have a victim and we might be some years out from that, but when it collapses, it will collapse quickly. However, I’m sure there are some indications and warnings that a good researcher would be able to find. If you scanned for ad-posting frequency online you would figure out how quickly the network is growing and get to a good estimate of a potential end date. Google trends is a good place to start. • Oscar says: from your point of view, how long it will collapses? just take a guess • tim says: 3 years . . . but I imagine the collapse will be “complicated” — lots of people will lose money, but others will argue that there is a new, better business. The trick in managing something like this is to keep the game constantly changing. It looks like their strategy is to constantly play a shell game with a “new thing around the corner”. Something important in this discussion is the concept of “dutch disease”: the long term negative effect that comes from an easy, but non-sustainable source of money. You might be making money this way, but since you are not applying a real skill, you are learning the wrong things about making a real income or investing in a viable business model. The best thing you could do is think critically about the business and develop that skill. For example, don’t focus on wether people are making money or not, but focus on the business fundamentals. • Marlene says: Your guess is 3 years, 3 years from when? From 2012, 2013 or 2014? They started a new compensation plan last March 9, 2014. Would that be 3 years from that or from when it initially started? 2012? • tim says: things are falling apart fast — my guess is now three months. 5. Kelvin says: Hi, Tim, great arcticle and outstanding source of information about the real deal with Telexfree, could you please send me the spreadsheet you have developed? 6. Vincent says: Telexfree has just arrived in kenya and people are realy looking forward to join this coz the deal sounds very good thanks for the heads up i now know how it works and the risks involved. 7. Joseph says: great work Tim please sent me the spread sheet Tim • JoJo says: Thank Tim, I’m not yet join it ,but I plain to join it. Can you give me your spreadsheet ;). 8. Benjamin says: Send me a copy of your spread sheet too! Thanks for an awesome article. I made a spread sheet myself. I joined already, but have not yet paid for the membership fees or for any adcentrals. My plan was to buy 5 Family AdCentrals, which pays out$100 each a week, and make $100,000 per week in 19 months. I laughed and said this is impossible. But some people are actually pulling in$5000 per week. I got excited, but had to get more information. I’m glad someone like you realized what I see here. I asked myself: the product is unique and why are they compensating so well for a trade off of your own money? It’s just a matter of time.

9. Hello Tim,

Thanks for an informative article on TelexFREE.
I’ve joined already but I’m going to start getting my money back now!
Google trends shows their number going back up to 71 as of today 2/21/14.

Thanks, Bob

• tim says:

Yeah, I need to get the spreadsheet — which is at work. But really, the math is simple of this. What is complicated is predicting the time horizon before collapse. These dynamics can play out over a number of years. Madoff could keep investors in the dark for 20+ years. The US government is not able to act quickly on this because prosecution requires victims — and right now everyone should still be making money. The key inhibitor for me would be the ethical problem that every dollar I make is going to be stealing from future participants — kind of like how modern debt-based economies work!

10. Yousaf Meera says:

I am a member and getting $100 every week, but I am afraid now. Can I have a copy of your spread sheet. Thanks. Regards. MEERA 11. Rahul Ahuja says: Thank you for your clear and articulate analysis of telexfree Tim, appreciate the time you put into this. I was actually in the process of doing my due diligence before investing in this company. From the initial research it seemed like it wasn’t scam but when you simplify it like you did and it comes down to the ethical question of whether I want to be taking/stealing from future investors, I am definitely not interested anymore. Just because I can’t see the victim of this right now doesn’t make it ok for me to make money off their future loss. But you are right, for people who don’t care about the ethical aspect and can find ways of justifying this (and I’m not judging anyone who has already invested or that still might) money can probably be made from this at the moment. But who knows for how long. cheers Rahul 12. Tim: I have created an overview and analysis from a legal and regulatory compliance as it relates to a network marketing company and opportunity that you should review-you’ll understand why it is now under investigation in the U.S. and likely to be shut down for being an illegal pyramid scheme, although the company has major overhauls to their program in order to escape the wrath of the regulators in its home state of Massachusetts and to avoid going to jail. The overview is of the program as it stands around the beginning of March of 2014. I will add an addendum to the analysis shortly as we have gotten wind of what these likely changes are going to be! You can read the overview and analysis at http://www.telexfreereport.the6parameters.com (I reference your analysis towards the end of the review.) 13. Samuel says: How can I obtain the spreadsheet that you mentioned? 14. Dobbie says: Wow Tim this is was a great.. reading I must correct something In Brazil and Peru Telexfree still working, only was banned in one State of Brazil but as well its Internet business, basically is running well in the whole country, many people in Brazil are getting a good extra income. .I got into Telexfree few mouth ago and they’re paying I have no complex for sure, around one year ago I get aware about Telexfree and for me it did sounds stupid… I am Ad Man, I know everything about Internet ads… the whole telexfree i didnt makes sense to me at all, so I entered the business cos i see old friend there, he is not the type of person that is buzzing around with this type of MLM but he started making money a lot of money, so I see it was truth… I am like waiting any moment for the worse… that one day Telexfree would be declared bankruptcy, well Few days ago, specifically 9 of march Telexfree changed they Compensation Plan and look more Ponzi but is more cheaper to join now andl look more easy… I understand that the telephony product is a smokescreen.. .it works but seriously.. who would pay$50 for VIOP?
I understand that thing with ads are a little dark… or better said kinda weird
So how it this could be a Ponzi schemed and still is up to their feet and u don’t see people back channeling, or complain that they don’t get pay..
How they can pay everyone, there’s so many people there, even people do not have faith at all on Telexfree
How can they allocate all money into investor pocket, so safe and quickly?

Thank you!

Second, they have been shut down countrywide in Brazil since June of 2013! Where have you been? You must be listening to some uninformed, misinformed upline! http://gazetaonline.globo.com/_conteudo/2013/06/noticias/dinheiro/1450164-justica-determina-que-telexfree-nao-pode-mais-recrutar-divulgadores.html

Nobody in Brazil has been paid since June of 2013 per court order and threat of fines if they recruited any new people and paid any commissions-in addition, TelexFree assets were frozen in Brazil! TelexFree International, the U.S. entity, has been circumventing that court order by having people in Brazil sign up in the U.S. based entity with fake addresses, etc., which will land them in even more hot water!

Third, they are now under investigation in the U.S. in the state of Massachusetts by their state SEC type regulators. http://www.milforddailynews.com/article/20140305/NEWS/140308025

Fourth, they are also under investigation in several other countries, Rwanda being the most recent country to announce an investigation: http://www.theeastafrican.co.ke/Rwanda/News/Rwanda-govt-probes-TelexFREE-over-Ponzi-scheme-claims-/-/1433218/2226134/-/aha5x8/-/index.html

Finally, I would suggest reading this overview which has been written from a legal and regulatory compliance perspective (this analysis was based on the original program-a new analysis will go up on the recent changes they’ve made shortly): http://www.telexfreereport.the6parameters.com

16. Amos says:

Great article Tim, unbiased analysis, If I saw this 4 months ago I would have thought twice before joining. Please I need the spreadsheet. Please for my friends sake. They would think I am hiding a good biz from them.

17. Neil Spellman says:

Good explanation Tim, I believe your efforts here will keep some people away from this program. Despite the numerous voices on the internet offering testimony of their success and belief in this system they are focused on small segments of the population, the Brazilian/Dominican communities with a message that is part economics and part evangelical. Even as I write this the investigators in the MA Secretary of State’s office may be looking at their tax returns and corporate data, to see if the Executive Officers are receiving the bulk of the fees that are being collected. It may be awhile before the victims start self identifying because of the message that their failure is due to lack of effort, the blame is then deflected from TelexFree.

18. Semisoet says:

Thank you for the great article. I only heard about this “scheme” today. I am in South Africa. I must say I am very tempted but scared after reading this. Can the US scheme also take back money from people in other countries after being exposed?

• The answer is Yes! They’re called a “clawback.” You can learn more from the website of one of the industry’s top law firms-Thompson Burton. Go to http://www.thompsonburton.com/zeekrecovery and scroll down to section entitled “Zeek Receiver Issues Quarterly Report” and then look for the subsection entitled Clawbacks.

• The answer is Yes! They’re called a “clawback.”

19. Alice says:

This is really sad, I just hope I would recover my money before it comes down. I wish I knew early, I was actually suspicious when they changed the business plan. Thanks for info Tim please can I have the spread sheets to advise my friends who would like to join now.

20. Noemi says:

21. Ciaran Collins says:

Great article Tim, very well researched and articulate.

Some sub contractors where I work are jumping on this bandwagon, (They are Brazilian) I tried to explain that it stinks like a ponzi scheme, a previous employer lost a substantial sum through Terry Freeman’s GFX scam 4 years ago. However they really won’t listen.

I have forwarded this article and hopefully they can see sense before they invest too heavily. Their plan is to see how they get on with 1 family investment (Approx GBP£1250) and it they payment comes in one month they may invest for the whole package. Around £10k?

22. Ed says:

Telexfree has filed for chapter11in the US with expalanations that they are taking time out to restructure. Telefree is catching on fast in Africa and I have been approached by close pals to join. Kindly send me the spreadheet so that I can warn my buddies against it.

• tim says:

You don’t need the spreadsheet. Telexfree’s assets are frozen. Their bankruptcy application will be denied. There will be no way to sign up.

• Samuel says:

Do you know when they filed for bankruptcy and where?

• Ken "the MLM Professor" Stewart says:

The bankruptcy filing is going to be a moot point…Now that the “big boys” (the SEC-Securities and Exchange Commission) are involved, TelexFree is toast! You can start planning the funeral! The owners and some of the top promoters will be lucky if they don’t go to jail-they and a number of other “net winners” will also be hit with “clawbacks.” This is what happens when people don’t know how to evaluate companies and opportunities and when they ignore the warnings of those of us that are REAL experts!

Anyone who reads this article from the Boston Globe and still believes anything the owners like Carlos Costa are saying needs to have their head examined and picture put in the dictionary next to the world “stupid!” http://www.bostonglobe.com/business/2014/04/17/sec-freezes-assets-telexfree-and-eight-people-affiliated-with-company-alleged-fraud/fZwPyvFkLJD6nDy9BKaHiK/story.html

If you know any leaders in the Dominican Republic and/or Colombia, contact me on facebook at http://www.facebook.com/kenstewartmlmexpert

23. Victor says:

I wish I saw this this before joining about a month ago. A whole year savings of \$10,000 was put into it. Is there any hope of getting the money back? I haven’t received a single payment from them.

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