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Keep Your Startup Safe – What Founders Seeking Investors Online Must Know

Founders have more ways than ever to raise capital for their new company in the digital era, however they must always be highly cautious when dealing with investors online.

As you may have already noticed, finding investors online has become increasingly popular, with a growing number of crowdfunding platforms and angel investment platforms similar to ours continuing to appear. Startup networks are reinvigorating the outlook for entrepreneurs, and changing the way deals are done by helping more and more promising companies connect with game-changing investors. As such, these online networking platforms have become an essential tool for pretty much any new business who is seeking funding. That said, they can also come with new threats, especially for the startups. 

Incidents of individuals posing as high-net-worth angel investors in attempt to scheme startups are becoming more frequent. Unfortunately, because an increasing number of startups are looking for funding, the problem is almost certain to worsen – Especially if many founders remain unaware of the danger, and fail to practice proper due diligence when conducting business investment deals online.

At Qilindo, our mission is to help more startups and investors find mutual success in a brand new way, by providing them with a free platform where they have the complete liberty to negotiate business partnerships however they see fit. The fact of the matter is anyone can claim to be an investor, and new companies are typically eager for funding. In the end, it is up to the startup to proceed responsibly when dealing with anyone who approaches them as an investor on any online networking platform.

Always pursuing our efforts to help protect the community of brilliant entrepreneurs, we put together some valuable advice to help recognize potential threats and help founders take the right cautionary steps to keep their startup safe against scammers. So whether your startup is joining our platform, or others such as AngelList, Beamstart or InnMind, we encourage you to read on if you want to prevent being taken advantage of by fraudulent investors.

Spotting the red flags

Scammers have developed new devious strategies which are much harder to discern than the classic old  ‘Nigerian prince’ scheme (also known as the 419 fraud). Those who make swindling startups their specialty practice even more cunning ingeniosity. Make sure not to be fooled by the absence of typos, as these con artists can send personally addressed messages in eloquent english. Their approach and stories are quite plausible, even for some more experienced founders. Here are some major red flags you should watch out for if you suspect a fake investor is attempting to exploit your startup.

  1. The investors suddenly appear out of nowhere

Sad to say, but business angels don’t simply fall from the sky. Legit investors have plenty of deal flow to keep them busy, and it is extremely rare for them to contact a new, unknown startup without some sort of trusted connection or referral beforehand. Beware of anyone eagerly reaching out and ready to offer you money right off the bat, without even having heard the pitch and without any prior discussion of the company’s financials or valuation – it’s just not how real investors proceed, ever.

  1. The investors have no history

You may have never heard of the investor, and that’s okay. However, if they have no online presence (no website, no social media profiles, etc.) it’s much safer to assume they are phoney. Often, these scammers will claim to be first-time investors outside the country in an attempt to rationalize why you’ve never heard of them and why they have no prior deal history. Don’t fall for that, and always do your research (keep reading, we’ll get to the research part.) 

  1. The investors’ terms seem too generous

Only your multi-millionaire uncle might possibly offer you an honest ‘bro deal’. Otherwise, consider any offer that doesn’t make financial sense for an investor to be bogus. Suppose your company is brand new with no revenue and an ‘investor’ proposes a 3-year loan at 5% interest –  Stay away. A good rule of thumb to keep in mind is that venture capitalists and business angels typically have to make at least 15 times – not 15% –  their early-stage investment to make up for the 90% of investments that fail. Any offer that seems too generous is also too fishy, especially if the amount on the table is bigger than what other investors are willing to risk. 

  1. The investors require an upfront payment for you to access the investment

It is not unusual for investors to require the startup to cover some closing fees, and not uncommon for these fees to be capped around 10K. However, whatever the amount to cover the fees may be, it is always deducted from the investment. A real investor will never require a startup to pay for anything upfront, simple as that. So whether they are calling it banking fees, legal fees, or insurance charges…It is all the same scam.

Fake investors know they must take advantage of our brain’s natural decision-making process, based on risk and reward. Suppose they are willing to invest half a million and all your company needs to do is pay 10K to cover the legal fees, or even 5K to cover half of them, someone is trying to rob you. This continues with the point above, as scammers know that they have higher chances of compelling us if the fees seem tiny in comparison to the generous investment they are claiming to put forward.

To make things even sneakier, the con artists will make you jump through some hoops first. In order to obtain the disingenuous offer, startups may be required to complete an evaluation process. This makes it seem as if you are involved in a legit affair. Even when sensing something may not be right, one could still think “This undertaking is way too much effort only to steal 5K, right?” Wrong. Please don’t fall for anything of this sort, no matter how low the amount asked for upfront is – even just $100 – shut the discussion down.

Essential precautions to avoid scam investors

Some warning signs could be more obvious than others, and some scammers are more skillful than others. An easy way to be safe is to apply the rule “If it seems too good to be true, it is.” It’s very risky to believe you’re the one taking advantage of some fools fervently offering you a once in a lifetime deal. Real investors are not ignorant nor incompetent, and they certainly have better things to do than beseech you for a partnership. 

Whatever the scenario may be, if you’re sensing a scam of some sort, consider it is safer to shut the conversation down. If you’re unsure and you want to expel any lingering doubt in your mind, follow the scam screening method below.

  1. Request a meeting

In any case, even when you’re dealing with a legit investor, we recommend some face time to better know your potential partner. It is also a very good way to shut down a fake investor from the very start. If you suspect a scam, request a virtual meeting if an in-person meeting isn’t possible (often because they are foreign billionaires located in a far away country, of course.) A phone call is not sufficiently safe, so insist on a face-to-face meeting. If the supposed investor makes excuses about why they cannot meet face-to-face or is constantly pushing the meeting back to a later date, you are almost certainly dealing with a scammer.

  1. Research the investor

Find any information available on the web about the supposed investor, then double check it. Fake investors are more sophisticated scammers, with well-designed LinkedIn accounts, along with corporate emails and fancy looking company websites. Here’s what you should do:

  • Keep in mind that LinkedIn has no KYC or user verification process, so it is very easy to create fake accounts and schemes on that platform. See if you have any mutual connections, and if you do, ask these connections if they really know the person. Scammers may have purposely added some of your contacts to their network to increase their trustability (many of us are guilty of clicking ‘accept’ at least once when a professional looking stranger invites us to “connect”.) Check if they are actively posting updates about their firm. We strongly suggest you double check the profile to make sure it isn’t an imposter of a well-trusted figure.
  • When you land on a fancy website, immediately look for the office address, the phone number, and clear information about the investment team including links to their social media profiles, email addresses, bios, as well as details about their investment focus and examples of what businesses they have invested in before. Once again, double check all of that. Fraudsters may set up websites using URL addresses or names similar to those of registered firms or investment professionals to trick you into believing they are registered or affiliated with a registered firm or investment professional. You can check their history of investments by asking to see their portfolio of investments, and research the companies they have invested in. Don’t be shy about asking for referrals i.e. contact details of the other founders they’ve partnered with, and consult the official business registry of the country they are based in.  
  1. Analyze the conversation flow

You should expect investors to have plenty of questions about your new company. Real partners want to understand your business model, your scaling plan, your vision, etc. before moving any further or throwing out a number. They will not make any investment offer after seeing a pitch deck only. So be highly suspectful if anyone approaching you as a business angel or VC firm proposes a deal after the first conversation.

Remember the conversation between investors and startups should go both ways. Just like they have many questions for you, they need to be transparent and share their information without hesitation. If they seem to veil information, deter your questions, or – arguably the biggest red flag of all –  make the conversation about fees and demanding money from you…  End the conversation.

What else can a startup do to protect themselves against fake investors

It is crucial for the founders of startups to be aware of the threats and how to avoid them, since there is only so much platforms or apps are allowed to do in order to vet investors and weed out the fakes. It’s reasonable to say it’s unfair, especially since startups are put through verification procedures, and because the scam investors problem is rather underrated by the authorities and media. A quick search for ‘fake investors scamming startups’ on the web will give you very little information. Instead, it will give you countless articles on how investors can avoid being scammed by startups. We saw the urgency to compile and share this information, as it is part of our duty to do everything in our power to create a safe and fair place for both startups and investors to develop win-win partnerships.

Let’s help protect the community from fake investor scams:

  • Always be vigilant and apply the advice above anywhere you happen to be conducting business investment deals online. Fake investors may try to contact your startup via angel investment platforms, social media or messaging apps, and by email too. 
  • Always report scammers. Report fake user profiles on LinkedIn, and any fake investor who approached you on any platform or app. If there isn’t a systemized flow for you to report the information, simply contact the team via any method most easily available to you (email, live chat, phone, etc.) If you are a victim of a scam, report it to the Internet Crime Complaint Center (IC3).

Finally, if you feel you benefited from this article, we encourage you to share it in order to help spread the useful information to all who may need it – And there are many who do.


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