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The Dark Side of Entrepreneurship: Unveiling Startup Scams

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Entrepreneurship is at an all-time high in the US, with 5.1 million new businesses registered in 2022 alone. Inarguably, entrepreneurs are the lifeblood of any economy, creating jobs, driving innovation, and fueling economic growth.

Unlike established large-scale organizations, startups are more willing to take risks, explore new opportunities, and create new products that ultimately lead to greater product choices, healthy competition, and the creation of economic value.

However, the past few years have seen the once dazzling startup culture marred by a series of scams. In this article, we take a deep dive into startup frauds and how you can guard against them.

Startup Scams: What You Should Know

The infamous FTX scandal that robbed over 1 million investors of their savings and the fall of Theranos, which duped investors, healthcare providers, and patients with fake tests, are some of the biggest startup scams of the decade that shook the world.

These are often the result of entrepreneurs losing sight of their businesses or getting overly greedy in the pursuit of money.

To avoid getting your fate entangled in a similar scandal, understanding the potential risks of such fraud is essential, whether you are a potential investor, employee, vendor, or business partner.

What types of startup scams can you experience? The common threats include:

  • Fraudulent investment opportunities based on vague business ideas.
  • Startups that deceive customers using misleading or non-existent products and services.
  • Fake businesses that con potential employees with job scams.
  • Shady startups that raise purchase orders without adequate funds to meet the vendor payments.
  • Phishing scams that hunt for identifiable personal data of potential investors and customers.

All these may certainly seem alarming. However, you can avoid many of them by identifying clear warning signs that give them away.

Common red flags include:

  • Investments with unusually high returns and low risks.
  • Claims and promises that are not backed by sound data or research.
  • Vague information about the business, its promoters, and financials.
  • An inexperienced team with no credible references.
  • Contradicting details or facts.
  • A lack of publicly available material, such as a company website or third-party content from verifiable sources.
  • Pressure tactics, including limited-time offers and one-time deals.
  • Requests for personal information.
  • Reluctance to meet in person, especially at the registered business address.
  • Prospectuses and websites with grammar errors and free stock images.

Guarding Against Startup Scams

What safety measures should you take to protect yourself from startup-related fraud? Here’s what we suggest.

Research the Business

Attending to due diligence is critical before engaging with any startup.

If you are an investor, ensure the respective company has a detailed business plan backed by verifiable data and operational strategies.

Check whether it contains enough information for you to understand the business’s financial health. How well-thought-out is the business model? Is it practical, or seems too far-fetched? Does the company already have a pipeline of leads?

Find out as much as you can about the founders, too. What work experience and industry exposure do they have? Do they possess the specific technical expertise required by the business? How passionate are they about their business idea?

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In addition, spend enough time to assess the market. How fast is it growing? Who are the competitors? What factors could threaten the business or create future opportunities for it to grow?

Review third-party content published online about the startup. Keep in mind that some of them could be paid or sponsored material. Identify these and prioritize the content that seems objective and uninfluenced.

Be Skeptical About Sketchy Promoters

You will likely come across hundreds of business founders seeking support at startup conventions. These ambitious entrepreneurs may even reach out to you on social media platforms to share a prospectus.

When dealing with strangers, 

  • Practice caution without getting overly excited about a business plan on paper.
  • Find them on LinkedIn and review their profiles.
  • Look for mutual connections in your network who could provide a reference or recommendation.
  • Reverse search their contact numbers on Nuwber to learn more about their professional background.
  • Meet the startup owners in person at their office, warehouse, or plant instead of at a hotel or your workplace.
  • Watch out for any discrepancies or red flags during your communications with them. Have they provided any contradicting or vague information? Are they avoiding certain questions? Do they seem unusually nervous or unsure? Watch out for these telltale signs that could warn you of a scam.

 

Manage Your Expectations

Certain startups have the potential to generate a substantially high return. But this is not always guaranteed, which is why investing in them is risky.

Understanding and accepting this is essential for managing your expectations without giving in to overly tempting deals.

Scammers often use abnormally high returns as bait to lure in inexperienced investors. They could also assure you of low or no risks and provide attractive terms that appear to safeguard your interests.

Any business that makes such promises and claims is guaranteed to have ulterior motives.

Protect Your Personally Identifiable Information

Keep your PII safe when dealing with unknown startups, whether you are looking to invest or find employment with them. If they ask for personal data, don’t hesitate to inquire why they need it.

Fraudsters could target you for a startup-related scam based on publicly available information, too. For instance, they can gain invaluable details from what you disclose on social media and other platforms. Therefore, think twice before sharing too much about your personal life in cyberspace.

Cleaning up your digital data footprint is another prudent idea. Delete cookies, close unused online accounts, and request third-party sites to take down any references to you that may potentially compromise your privacy and safety.

To Conclude

Learning to identify common startup fraud and taking proactive precautions are essential for avoiding scams and benefiting from the many opportunities a vibrant and dynamic culture of entrepreneurship offers.

Having said that, if you ever encounter a startup-related scam or fall for one, remember to inform the Federal Trade Commission and law enforcement agencies. Alert your bank and other related parties, too, and raise awareness among your loved ones.

 

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