There’s a common cliché that says salespeople are the most easily sold. It’s a cliché for a reason. Entrepreneurs often make quick decisions without much strategy behind them, because they trust their gut. They like working with other small entrepreneurial companies, especially if they see their own qualities in individuals they work with. This leads entrepreneurs to make the mistake of signing service agreements with small businesses on important projects like information technology and finance, when they are likely better served by large established players. I’ve actually seen a situation where the IT company went bankrupt and the company lost all their data. But I’ll get into that another time.

 Companies starving for capital tend to jump at every opportunity when they receive a call or get hit up on LinkedIn by an investor who’s interested in putting capital into their company. I have even seen CEOs get on a plane to meet an investor after just one phone call. If you figure out within two weeks that the investment is not real, you are lucky. I have heard multiple horror stories of companies that have been dragged along through the process of executing a Letter of Intent and then being locked into exclusivity, only to find out that the investor never actually had the funds to invest.

 There are so many fund companies out there: angel funds, venture capital, private equity, investment banks, family offices and high net worth individuals looking for investment opportunities. If the investors are large, reputable players that have been around for decades, there is little reason for concern; however, as a small business, you are more likely to be contacted by funds that you have never heard of.

 Many of these fund companies are trying to gather information on industries for their own business. When you provide your business plan and investor presentation, you have inadvertently also provided them with a rich source of data that educates them on barriers to entry, competition, market size, etc. It is entirely possible that they are using your information to assess another transaction in the same space. How do you avoid this common pitfall?

 Here are a few tips before singing a Letter of Intent:

 BE READY. You only have one shot at making a good first impression. The worst mistake you can make is engaging an investor without the right materials. Investors are always looking to poke holes in your company so they can hammer the valuation. If you are planning to raise capital, ensure your financials are completely in order and that you have a business plan, three years’ worth of financial projections, an investor presentation and an exit strategy. This makes all the difference on the valuation.o work on the new project or place them into the existing business so there are no interruptions. If your current cash cannot support this new venture, I recommend business owners not to proceed with the project or go out to raise the cash. I am all for cutting expenses generally, but half assing a new business venture is recipe for disaster. By allocating the correct amount of resources and taking a calculated risk, you increase your chance of success significantly, while being tight on the purse strings results in a certain failure.mely expensive project. Therefore, it literally pays to hire an accounting professional early on, to set the accounting system up internally so that it tracks information that you will very likely need for a capital raise.

  Do research on the fund company. Have they made investments and do they have expertise in your industry? Ask if you can speak to a couple of their clients to gauge their experience. Think of this as a reference check.

 Ask point blank if they already have the funds available or if the funds need to be raised. If it is a high net worth individual, ask to see a bank statement. If they seem offended by these questions, then they are not being transparent, and you probably don’t want to do business with them anyway.

 There are a whole series of fit questions that should be asked to determine if the investor is the right partner for you, and these vary from company to company.

Sign a Non-Disclosure Agreement. It is very difficult for you to prove that they have used your information, but at the very least it is a deterrent for the investor to use your materials in their documents that are widely shared.

 If they ask for an exclusivity period during the due diligence process, demand an upfront fee that is only refundable in the event they find any misrepresentations. No investor is serious until they write a cheque.