15 Startup Scams You Don’t Want To Copy
Real stories of startup founders and VCs committing fraud in pursuit of prosperity that turned into a fiasco.
Running a startup, as well as investing in startups is the high risk — high reward activity, which can produce either great returns or considerable losses for any party involved. There can be countless factors that are impacting the outcome of any venture: from the state of the market to timing, luck and human qualities. Some compare running a startup to war: a war between competitors for the market share, for the employees and eventually for the customers’ dollars.
Being under heavy pressure from the investors, customers and the wider public, startup founders have to apply extreme creativity in order to showcase great performance within a short period of time. At times, founders are willing to reach the targets by any means, including illegal ones — any port in a storm. Most founders eventually get caught and their fraud is made public. Depending on the severity of the violation, the consequences for founders and those involved can range from financial penalties to facing criminal charges and actual imprisonment, as well as a ban to carry out business activity in the future. Below I put together a list of some well-known, as well as not so famous startup scams. While reading further, please keep in mind the aforementioned outcomes and don’t treat the following as any sort of a manual or a call to action.
The company was developing a hardware device and was claiming to have developed a proprietary technology, which turned out to be completely fictitious, the team ended up lying to its investors, clients and the press. Having released an incomplete product that did not work as promised, they repeatedly denied accusations of wrongdoing in mass media.
An Insurtech company wrote a script that allowed its resellers to artificially inflate the number of hours logged in the state’s certification program which was mandatory for its resellers due to regulation. In addition, the same company was later accused of selling its products illegally via unlicensed resellers.
A company that was producing and selling direct-to-consumer eco-friendly and natural products turned out to be producing products that contained synthetic chemicals, some of which were toxic.
The company founder defrauded investors having used a number of shell companies to allocate funds from investors to his personal accounts. Also, the same founder used funds to support his other business ventures, as well as to pay for personal expenses and even to pay a penalty fee charged against one of his other companies.
Due to weak sales, but still in need to secure additional funding, the company hired independent contractors who were instructed to secretly buy back the company’s products from supermarkets, creating the perception that the product was significantly more popular than it actually was.
VC partner used investors’ money to fund his extravagant lifestyle, incl. hiring luxurious cars, co-producing a music video, yacht cruising and luxurious spa treatment among other things, which can hardly be considered as appropriate operational expenses associated with running the fund.
The founder falsified signatures in an acquisition offer from a large corporate in order to convince a lead investor to participate in the round. Also, he forged multiple signatures from the board of directors to approve a loan from one of his existing investors in order to cover the cash gap.
Founder fraudulently claimed that he received a degree from a prestigious business school, used to work in a large tech company and had access to significant personal wealth, that he was investing significantly into the company, all of which turned out to be false.
A founder created an atmosphere of highest secrecy around key developments of his startup, incl. finances, contracts, investments, etc. as a means to hide the true inner workings of the company from anyone incl. his own employees and financial backers. After a thorough investigation, most of the promises and showcases of the company turned out to be quite shallow.
Employees of a large fintech company, that is developing a p2p lending marketplace connecting investors with the borrowers, went into the company database and fabricated loan applications to make them look more appealing to investors and eventually get better APR and loan terms.
The company was inflating data about its downloads and sales metrics for many years in order to attract funding from investors and attract the best talent. An internal engineering team made a bot that was publishing inflated downloads, sales figures and other metrics in the internal chat for investors and all employees. They ended up raising $30M and shut down the company in 7 months after raising their Series B.
A founder boasted of having developed AI technology that used computer vision, audio, and text analysis to look inside videos and could tell clients how their brands were trending online by analyzing video reviews posted online. After an investigation conducted by one of its investors, it turned out that instead of using AI, the company paid workers in India to watch videos and record their impressions.
A company that is providing after-school online tutoring services was accused of inflating sales and usage metrics with at least 70% of its 50,000+ users in the classes being bots. Such conclusions were made after the analysis of class attendance was made where large groups of users were joining classes at the same second for a long period of time.
The company repeatedly pushed back the shipping date of their consumer hardware device, blaming logistical difficulties and technical problems, while the founders lived luxurious life spending most of the money on fancy purchases incl. sports cars and motorcycles and entertainment at a gentlemen’s club.
A startup founder was so good at fundraising, that he managed to raise funding for 2 of his companies in parallel from different investors. No big deal you would say? All if it wasn’t for the same concept! The fraud was revealed after the investors from both companies accidentally met each other.
I hope you enjoyed reading through my blog post. If you know of any other notable startup fraud stories, don’t hesitate to reach out to me at azemlyak [at] leta dot vc and I’ll make sure to add them to this list.
