How to Deal with Fake Startup Investors

The problem of fake investors isn't talked about enough, but it is real and almost every founder comes across different aspects of it, sooner or later. 

Nothing can be more disheartening than trying to raise startup money from fake investors, the kind that present themselves as investors but do not have direct access to the necessary funds or have no intention of investing at all.

It happens all the time. Yes, I got stung too (luckily, I got suspicious in time, so the damage wasn't too big).

Pitching to an investor who won’t or can’t actually invest is problematic in several ways, but the worst part is that it wastes startup founders’ most valuable asset - time.

The whole situation is baffling, especially since in many cases, when an investor says “no,” you won’t know if it was a genuine no or an encounter with a fake investor.

But an even worse scenario is getting a “yes” from an investor who doesn’t actually have the funds or intention to invest. This can create a real mess, and unfortunately, I’ve seen it happen, too.

For this guide, I will first review the 3 basic types of fake investors. Next, I'll list 5 tips to avoid getting scammed or involved with fake investors. Finally, I'll give five pieces of advice on how to protect yourself from fake and/or disappearing investors. 

The three basic types of fake investors

Investors or “investors” that don’t actually invest can be put into three buckets:

1. Totally fake/ crooks: Some crooks use twisted methods to get money from founders with the promise that they are about to invest. I've seen two cases where founders were lured to faraway countries at their own expense, only to meet someone pretending to be a rich family office owner. (I was able to stop one of them halfway, crazy story). This is apparently a common type of scam, but it is only one of many. 
   A more prevalent (and less dangerous) type of fake investor is looking for opportunities to make money off you by selling various advisory services. Others waste founders' time by pretending that they are considering investing, while in fact, they are trying to get someone else to invest and give them a finder’s fee.
2. Constrained/wannabe: These are angels or VCs who do actually invest or manage money for LPs, but might not be able to invest at a given time. Unfortunately, instead of being honest about their constraints, some investors choose to drag things out, pretending to do a thorough DD or whatever, hoping that they will be able to get their LPs to give them the necessary funds. Some might need your startup around only to show their LPs they have some deal flow.
3. Spying/snooping: This happens more often than people are willing to admit. VCs want to know what's going on in the market, invite founders to a call, and then say, "You're too early for us" - when they never meant to invest in the first place.
   The darker version of this is when VCs spy on new companies to help their portfolio companies against competition.

How to avoid fake investors

Here are 5 tips to help you avoid fake investors, or at least disengage from them before any real harm is done.

Here goes:

1. Research and get referrals: Of course, you should research investors every step of the way. Do initial research before you reach out to them. Then, some deeper preparation and research before your first meeting. If things progress, you need to learn even more about them, get referrals, and ask around. The best way to get real insight about investors is to speak with founders from their portfolio companies.
2. Trust your gut and stay away from toxic investors: If you reach out to investors regularly and proactively, you will connect with enough good investors to raise the money you need. Don't waste time on people and investors who make you feel bad. Trust your gut if something feels wrong or fishy. Don't stick around investors if they are condescending, intimidating, or gaslighting you.
3. Ask questions: Ask questions and do it early, on your first meeting or introductory call. You should know your investors' usual ticket size and their decision-making process, including how long it takes them to decide.
   If you have concerns about possible conflicting interests related to their portfolio companies, address those early.
4. Do not pay to pitch: Some investor groups and other entities charge startups to pitch. This is wrong, and it creates skewed incentives at best and is predatory at worst. It will probably not get you invested since such groups care more about creating events and monetizing them than they care about profiting by making successful investments.
5. Be extra cautious if investors reach out to you: Some VCs ask their associates to connect with every early or stealth startup, and that's ok. It doesn't mean that they invest. If other types of investors reach out to you and make you an offer, you should double-check who they are and what they really want.
   
   

How to protect yourself from fake investors

Here are five rules to protect yourself against fake or crooked investors and against deals that fall through:

1. Run away from anything that smells fishy: If your investors talk about making fishy deals, cutting shortcuts, using illegal or marginally legal tactics, dirty tricks, dishonest or scammy business moves, etc - run away. It doesn't matter if they are talking about their past or suggesting dirty tactics for you to apply against your competitors. If they are willing to con anyone else, they will eventually do it to you, too.
2. No! to paying anything and any strange request: Everything is closed and agreed, and now it's time for the investor to wire the money. And then something comes up - their lawyer wants to see if you have some kind of special insurance, or they need you to open a crypto wallet to transfer the money to, or they put the money in escrow and want you to pay the fees to release it. Or they just want one meeting in a foreign country... All these strange requests are almost always a sign of fraud - run away!
3. Have good legal help: Many, even most, deals fall through; it's just the way it is. But if a commitment has been made, it may be binding or have other legal implications. Be sure to have good legal counsel so that you understand the implications of each step in your negotiations with an investor.
4. Keep your options: So long as there is still a chance the deal will fall through - basically until the money lands in your company's bank account - you need to keep some open channels with other investors. Of course, this must be done ethically, without misleading anyone or disclosing confidential information related to the deal.
5. Money in, then out: Don't make any monetary commitments, new hires, purchases, etc, based on a promise or even a contract. Only spend the money you actually have in your bank account. Committing to expenses before you have the means to pay puts you at the mercy of others and your company at risk of going under.
   
   

Don't lose heart.

There are all kinds of people out there, but don't let bad experiences stop you from pursuing your dreams.

Getting through a lot of rejections and disappointments is just part of the game. In many cases, you won't even know if you were declined for genuine reasons or if something else was going on (such as the investor running out of funds).

Shake it off, move on, and reach out to the next investor - till you make it.