Educational only — not investment, legal or tax advice.
When you are raising, an email from an investor who loves your company feels like oxygen. That is exactly what bad actors count on. Some “investors” are outright scams; others are real but will make your life harder. Both are easier to spot than most founders think.
Red flag 1: you are asked to pay first
Real venture funds make money from returns on their investments and from management fees paid by their own investors. They do not charge founders to be considered.
Watch for requests for a “due diligence fee”, “legal processing fee”, “listing fee”, “escrow deposit” or paid “investor-readiness program” as a condition of getting funded. The SEC warns investors about the same pattern under the name advance fee fraud: a promise of a large payoff that first requires a smaller payment, which then never arrives. The direction of money is reversed for founders, but the mechanics are identical.
There are legitimate paid services (accelerator application fees at some programs, lawyers, fundraising advisers). The test is simple: paying should never be a condition of a specific investor’s money.
Red flag 2: nobody can vouch for them
A real investor has a track record you can check:
- A portfolio of named companies, and founders from those companies who will take your call.
- People you can find independently, not just a website and a polished deck.
- A clear answer to “where does your fund’s money come from?”
If they will not name a single founder you can speak to, stop.
Red flag 3: pressure and urgency
“This offer expires Friday.” “We need a signature today to hold your allocation.” Real investors move fast when they are competing for a deal, but they do not punish you for reading the documents or calling a lawyer. Urgency combined with anything unusual is a warning sign.
Red flag 4: terms that don’t make sense
- A valuation far above anything else you have heard, from someone who has done little diligence.
- Money promised in tranches that depend on vague conditions.
- Requests for control (board seats, veto rights) far beyond what the check size justifies.
- Unusual payment routes, crypto-only transfers, or money coming from an entity different from the one signing.
Red flag 5: real investor, bad partner
Not every red flag means fraud. Some investors are real but costly: they reopen agreed terms at the last minute, go silent when things get hard, or have a reputation for pushing founders out. The fix is the same: talk to founders they backed, including ones whose companies struggled.
The 15-minute check before any serious conversation
- Search the person and firm name with “scam”, “lawsuit” and “fraud”.
- Look up two portfolio companies on your own and contact their founders directly, not through the investor.
- Check that the people on the website exist elsewhere: past roles, posts, other sources.
- Ask where the fund’s capital comes from and who signs the checks.
- If any fee is mentioned, ask for it in writing, then walk away.
From the investor’s side of the table. I manage two investment funds regulated by Portugal’s securities regulator, the CMVM. A regulated fund has to say who manages it, who supervises it and where its assets are held. Ask any investor who approaches you for the same three answers, then check them against the regulator’s public register.
The short version
Money should flow from the investor to you, never the other way round. Anyone who cannot survive a few reference calls has not earned a place on your cap table.
Sources
- SEC Investor.gov: Investor Alert, Be on the Lookout for Advance Fee Fraud
- SEC: Exempt offerings (how private fundraising is regulated)
Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.
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