Start-up Founders Beware: Investor Scams Are on the Rise!

An alarming number of so called ‘VC-advisors’ have popped up like mushrooms after the rain. They claim to have an investor that is very interested in the solution you propose and they may even ask you to send them your deck and all your relevant financial information.

Others, will call you on your phone – generally voice calls only – and come up with various reasons as to why they cannot have a video call with you on Zoom/Teams/Skype/WhatsApp etc. The most audacious ones may even ask you to travel to another country to have a meeting with them; they will not tell you who you are supposed to meet, where you are supposed to meet that person they ‘represent’, nor will they offer to compensate you for your travel costs!

You may also find that a lot of these ‘secret’ investors appear to be based in Dubai, Singapore, and Thailand, or in one of the offshore havens where the conventional fiscal rules and regulations do not necessarily apply: The Caymans, Panama, and other similar locations.

At Circklo, we deal with a significant number of very technically advanced and digital-first start-ups whose solutions are likely to transform (and some even revolutionise) the way many conventional industries operate and position themselves. Some of our start-ups have already been approached by such ‘investor’ representatives, and their solutions’ potential for industrial espionage and all sorts of other nefarious practices is huge. And this category of so-called investors can sniff long-term potential from a million miles away.

In the foreign direct investment and international financial institution world, there is a very well established due diligence process known as KYC, aka ‘Know Your Client’. A KYC due diligence implies, among a variety of other assessments, checking one’s current investment portfolio and owners, delving further into the source of the money they are ready to invest, the directors of the business, and so much more. Individuals and their businesses alike are verified across numerous international money laundering and criminal databases.

In the fast-moving world of start-up deals, such thorough investigations may not always be possible or feasible, due either to the nature of the investment (type, size, sector etc.) or that of the start-up (generally lacking the time, skills and funds to check their investors).

As a minimum, what every digitally native start-up founder should be able to do is to check the social footprint of the said ‘investor representative’, and their networks of relations and influence, let alone to verify them across the variety of databases currently available for start-up investments such as Pitchbook and Crunchbase (others, too).

The fact that a website and an email address are mentioned in the signature of the email you receive means nothing. And a lot of attention needs to be paid to the sender’s email address: you would be surprised to see how many of these scammers use Gmail or Hotmail accounts.

When you desperately need funds to provide you with that extra runway or offer you a bit more breathing space, you tend to overlook the content of the ‘gift’, and you only see the packaging – a perfectly dangerous Trojan Horse.

At Circklo, we run bespoke campaigns for all our start-ups, with a very carefully curated list of investors – all checked for the investments they made, the number of deals and their value, the time they exited and so much more. Scammers have no scruples, and the fundraising world is yet another space where illegal practices can sometimes thrive.

If you are ever in doubt about how genuine the ‘investor’ representative/advisor/consultant contacting you is, below is a wonderful example of a reply one of our start-up founders sent (following our due diligence and advice on the said ‘go-between’ representative) to one of these scammers/money launderers who have asked him to travel to the South of France for a very hush hush meeting with his ‘client’:

“I would like to request a few more details about your client/investor and eventually, if possible, information about other investments you or your client may have made before.

We have other investors interested in our solution and, for us to take proper decisions, I have a couple of questions to ask you that are relevant to us:

1- Considering your company is an intermediary in this negotiation, what is your role or how will you get paid? If your participation has an impact in the investment, what will that be?

2- In which conditions is your client investing? Long? Medium? Short? What are his exit expectations?

3- Is your client a "silent" investor or will he take a board position or nominate someone to the board?

4 – With regard to equity, will he take ordinary shares or is he expecting to assume some kind of control through the golden share mechanisms?

5- What will be the discussion agenda if we meet in France? (Obviously a lot of things can be discussed but we would like to have a list of main topics) allowing us to get prepared with the relevant docs and information”

Needless to say, no reply has ever been received.

Our advice to all start-up founders out there is simple: never forget that due diligence goes both ways, so please make sure you check your investors, too.

Investment readiness has two dimensions for us at Circklo:

  • Investor profile
  • Start-up pitch preparation

Our team of analysts develops an investor profile for every start-up in our network, and matchmakes that investor profile with the available funds that have dry powder to invest over the next quarter. Based on the funds thus identified, we qualify the best investors for the round that the start-up is currently raising.

Our analysis involves the following investor assessment:

-           Industry preferences of the fund(s) that the investors have access to

-           Geographic preferences of the fund(s) that the investors have access to

-           List of service providers (legal, accountancy, etc) that the investor is connected with

-           Sample analysis of the last 5 investments that the investor was involved in over the past 12 months (inactive investors over a period of 12 months are disqualified from our matchmaking service)

Our business configurator programme is available to all our members, and it offers specialised support to improve pitch readiness for the round they are currently in, from pre-seed to series A.