How to identify an investment scam: five red flags to look for
RED FLAGS
As a consultancy for early-stage businesses poised for growth, one of the most common questions we are asked is how to spot an investment scam. The digital age has made it much easier for cowboys to create convincing profiles online to extort young businesses. However, with a good understanding of some common red flags, you can be confident that you are working only with legitimate potential investors.
While there are no hard and fast rules for spotting a scam, we have compiled a list of five of the most telling signs something is wrong. If more than a couple of alarm bells start to ring, it may be time to walk away.
Still in doubt? Then it’s better to speak to a consultant (you can contact us here 😉).
1. The roles are reversed
If you believe your business is the next unicorn success story, you will be flattered to finally receive the recognition you deserve from a potential investor. Sadly, an effective investor is seldom so forthcoming. Traditionally, it is the party seeking investment who does the chasing and the investor who controls the conversation.
A scammer will not be so risk-averse. While it is rare for an investor to approach a possible opportunity directly – especially in the early stages – it is possible. But you should be wary of any marketing tactics designed to push you into making a decision that is not fully your own.
Scams come in all shapes and sizes, but the one objective of all scammers is to get you to volunteer your own money to them. Of course, it is suspicious for a potential investor to ask you to part with money for any reason when you yourself are seeking funds. To get around this, scam artists will generally try to create a sense of urgency – e.g. by pressuring you to travel to their country – telling you that the opportunity is rare, or urging you to commit to something minor – maybe a new business plan – to win your buy-in.
These predatory tactics are designed to distract you from making slow, rational decisions. While you will be excited to hear from a potential investor keen to get to work on growing your business, we would advise slowing things down and asking for more information if requests start to look unreasonable.
2. A bad business model
As a business owner seeking investment, you already know how to make a company thrive. Investment scams do not often follow these principles, and you should question the motives and viability of an offer made by an unknown investor.
An investor who does not have a unique selling point, who does not specialise or cannot document winning case studies in a relevant sector should be approached with caution. When researching an opportunity, check their website. Most good investors will have an area of expertise, whether helping fledgling businesses with pre-seed funding or supporting more established companies further down the line.
This is not always the case. Larger investors may have teams dedicated to companies in different sectors or at different stages of their journey. After your first call with one of these potential investors, you should be partnered with a member of staff with expertise in your sector or dealing with companies at the same stage as yours. If the strategy of the investor does not change as you give them more information about your company, be careful.
To ensure a good fit, it is a good idea in any case to ask an investor approaching you questions about the sector that you know the answer to. Ask their thoughts on a recent high-profile deal within your industry, or why they want to work with you. Con-artists might be able to brag about having helped 500,000 entrepreneurs set up businesses, but will not have the credentials or industry knowledge to support that.
Finally, most scammers only go so far as to set up senior consultant pages on LinkedIn – the kind you would glance at after a first call. If you are suspicious that the company you are speaking to does not exist, search for junior staff within their organisation. It is a big red flag if there is no trace online of all the smaller parts of a company that keep daily operations running.
3. Lacking a footprint
Today, there is a wealth of information about businesses freely available online. When dealing with a business you do not know, it is always worth the simple check of looking up their business number.
One client got in touch with us after noticing that the business licence of the investor they were speaking to expired in 2016. They were sensible to ask their contact to confirm the number and shut down the conversation when referred back to the out-of-date code.
We took the next step of looking up the building listed on the company’s website. Many shared verticals have lists of customers available online and updated regularly. There were 139 companies operating in the 20 storey tower on Hamdan Street, Abu Dhabi, but not this investor. If your potential investor is not where they say they are, it may be a red flag.
Of course, many companies moved through the pandemic or are in the process of moving as working patterns change, and this is not on its own a guarantee of a scam at work. A phone call can always set things straight.
We also advise a simple background check on the company’s website. Investors claiming to have worked with thousands of companies will usually have held on to the equity in their website for some time. If a company’s website has only existed for a few months, it is another indicator something might be off.
You can check when the domain was registered on a whois service.
4. An incomplete online presence
Social media has made it easy for scammers to fabricate a convincing backstory. However, few have the resources to fully populate their online profiles with believable information.
If a client asks us to look into a possible investor, we start by looking up relevant profiles online. Scammers will often create fake LinkedIn profiles to give their operation a look of authenticity. But a few things separate them from real accounts.
Earlier this year, our team investigated a notorious scam in the United Arab Emirates. All of the company’s LinkedIn profiles were for senior staff, all employees boasted Ivy League or Oxbridge credentials, and all only had one example of work experience prior to joining the Investment Group – usually somewhere obscure and unrelated to investment.
Using a reverse Google image search, we found that one ‘Member of Consulting Staff’ with the suspected investor was using a picture of Game of Thrones actress Susan Brown! More worryingly, the Chairman of the Board was using a profile shot of a board member of a venture capital group based in Abu Dhabi. Soon after, many of the accounts changed roles overnight to join a new investment company.
Ask yourself: do I believe that this is a real person working for this company? And if not, why not? Con-artists often have hugely international and disconnected contacts on LinkedIn, sending out as many invites as possible to seem more legitimate. They are less likely to have legitimate circles of friends or believable colleagues. If you doubt that this person could really exist, consider calling a listed employer and asking about the connection. You do not need to suggest that you suspect they may be scamming you, of course!
5. Not known within their industry
While modern investors and funds have started to embrace corporate PR, not all will have their own social media channels. Still, legitimate businesses will attract competition; when you look up your potential investor, check whether or not similar companies are paying for advertisements linked to their search terms. It is unlikely that any reputable investment company would be seeking to win business from an industry outsider or known scam artist.
One trick scammers use to get around this is adopting company profiles with similar names to existing businesses elsewhere. Many countries provide freely accessible lists of businesses operating within their territory; by filtering down by industry, location and company size, you will be able to cross-reference the information you find online and establish the legitimacy of the investor.
Always ask: is this believable? If the investor claims to manage a multi-billion dollar investment portfolio but has a cheap website, no social media presence, no press mentions and no competition… something might be wrong.
It’s a good idea to see what other people are saying. Scam accounts are unlikely to have public pages on Twitter or equivalent where defrauded individuals can call them out. But business forums and Reddit pages are a good place to find people with first-hand experiences of working with various investors around the world – although professional consultants may be able to offer better impartial advice.
First steps
There are many good investment opportunities out there to help grow your business and would-be business owners should not be put off by the growing prevalence of scams. These five general pointers offer a starting point as you consider the different motivations of genuine and phoney investors.
If you think you might be the target of a scam or would like to learn more about how to protect yourself from fake investors, get in touch with us at info@matters2.com or book an appointment with one of our consultants here.
WANT TO READ OTHER REAL HORROR STORIES?
SUBSCRIBE TO OUR NEWSLETTER
TO RECEIVE UPDATES ON NEW ARTICLES
Sophisticated Investors and HNWI
EIS
THE CHECKLIST VALUATION METHOD
What Really Matters
TRLs
Solo Founders: Myths and Legends
The Abu Dhabi Investment Scam
Ideas Are In The Air
WITT Energy
Fundraising 101
You Can Get It If You Really Want
The Rocking Origins Of Crowdfunding
101 Startup Stages
The Optimist/Pessimist Founder
Good Stress Vs Bad Stress
Thank you for sharing your info. I really appreciate your efforts and I will be waiting
for your further post thank you once again.