As an early founder, you are desperately hustling for capital, hustling to keep the dream alive. This is especially true for startups that require a certain level of investment before they can break even.

You have been pitching your startup to several investors and the wait for a term sheet seems endless. Then an investment banker connects you to an investment fund based in the US. The said investor meets you online over a few calls and buys into your mission.

He also offers to meet your team in the US. Your US folks meet a charming investor at a fancy location abroad. The staff greets him warmly by name; he even casually mentions he owns the entire property. You’re impressed—after all, you’re talking to someone seemingly influential, wealthy, and eager to invest.

You receive a term sheet with the investor promising to invest $$ Mn in your company at a generous valuation.

A fairy-tale meeting, right?

Except it wasn't.

Recently, one of our portfolio companies almost fell into an elaborate scam by a so-called international "investor," let's call him Mr. X. After several promising discussions, a term sheet for a sizable investment round arrived. But something didn’t sit right.

Quick preliminary diligence raised red flags: vague online presence, zero traceable investment history, and oddly repetitive LinkedIn profiles. Digging deeper, our team unearthed a troubling reality:

- The investing company? Not even registered.

- Mr. X? Multiple identities, with a trail of fraud allegations.

- His associates? Completely fictional personas.

- Their diligence company? Non-existent or dissolved.

- The cherry on top? Mr. X had set an elaborate stage, even convincing hotel staff to treat him as the owner during meetings.

The modus operandi of this scam?

They request upfront due diligence fees.

Seemingly minimal dollars for a potential multi-million dollar investment - This is a very difficult offer to refuse.

This is akin to the lottery’s seductive gamble at play — you're enticed into paying a seemingly small amount upfront with the promise of a massive investment later.

Founders, here's the reality check:

Desperation makes you vulnerable:

When you're starved for capital, your judgment gets clouded. Take a step back, breathe, and review deals objectively. Seek feedback on the deal from investors, advisors, and people you trust

An international investor doesn't automatically mean credibility:

Geography is no proxy for legitimacy. Don’t be star-struck by "foreign investors." Scammers exist everywhere.

Do your diligence on investors:

Just like investors verify you, you must verify them.

Don’t fall for the lottery’s promise:

Just because an investment sounds like your big break doesn't mean it is. If it feels too good to be true, it probably is.

What can you do as a founder to avoid falling into such traps/ scams?

1. Conduct background checks on Investors:

Just as investors vet your business thoroughly, you must exercise similar vigilance:

Request detailed information about the fund, its structure, and the key people involved. Insist on a verified track record—ask for documentation on previous deals, such as transaction records or press releases.

Ask them to do a reverse pitch – Why are they the right investors for you?

2. Professional References are Essential:

Speak directly with professional references from peers in the venture capital industry. If the investor hesitates or refuses to provide credible references, consider it a significant warning sign.

3. Talk to Other Founders:

Request introductions to at least two other founders or companies that the potential investor has backed in the past. Genuine investors will be more than willing to facilitate these conversations.

4. Clarify Due Diligence and other Cost Expectations:

Legitimate investors are usually very clear on diligence costs and expect a third-party firm to be paid post-diligence. If you're asked to bear any portion of these costs upfront to an unknown firm or a related party of the investor, consider it a red flag

Concluding thoughts:

In our recent experience, vigilance paid off. The red flags were recognized early, and deeper diligence quickly exposed the scam, preventing a potentially catastrophic outcome. The company avoided severe financial and emotional damage, safeguarding its business and future.

Stay alert. Stay informed.

Finally, Trust, but always verify.