A letter of intent records that 2 parties intend to do business, typically ahead of a binding contract. In a fundraising context it is the artifact a pre-revenue company uses to evidence demand: a prospective customer states an intention to pilot or purchase, a partner an intention to integrate. Most of an LOI is expressly non-binding; only ancillary terms (confidentiality, exclusivity, sometimes a no-shop) bind. A memorandum of understanding is the same idea with even less force.
What separates a strong LOI from theatre is specificity. A useful LOI names a scope, an indicative value, a timeframe, and the conditions that must be met to convert it into a contract (a successful pilot, a milestone reached, budget approved in the next cycle). It is signed by someone who can actually commit spend, not by a friendly contact in a research group with no budget authority. Weak LOIs omit all of this: no number, no date, no named buyer, no conversion path, which is precisely why they can be collected cheaply and why diligence discounts them heavily.
The honest use is as a leading indicator with a stated conversion assumption, not as quasi-revenue. A founder who presents 10 LOIs should also present the realistic conversion rate and the gating conditions, because the investor will model it that way regardless. Overweighting LOIs (treating intent as booked demand) is one of the fastest ways to lose credibility in a deep tech diligence, where the gap between intent and a signed, funded contract is wide and well understood.