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Credit: Shutterstock

The scamming pandemic: How not to get screwed as a startup

From fake investors and obscure media to false mentorship and compliance threats — the list of scams that startup founders face in the U.S. is endless. Lifelong entrepreneur Michael Burtov explains how to navigate the dark waters of the scamming pandemic and steer clear of traps.

Falling victim to a scam is not uncommon for startups and their founders. Throughout my career I’ve seen all sorts of scams, from fake media outlet representatives whom you have to pay to publish an article about your startup, to unlicensed brokers who introduce you to investors for a fee. 

This list also includes “VCs” who charge fees for pitching to them. Once I even encountered a potential investor who “over invested” with a fraudulent check (only later to ask for a refund on the overpaid amount). 

Plenty of disreputable actors prey on excited, desperate and often vulnerable startup founders. Fraud is on the rise. Last year, scams in the U.S. increased by 30 percent over 2021, according to the latest data from the Federal Trade Commission.

We are in a scamming pandemic: startup scamming

This cultural inflection point was likely ushered by the many, many celebrity driven scamming startup projects that we’ve seen over the last few years. 

Matt Damon, Reese Witherspoon, Tom Brady, and Gwyneth Paltrow have been promoting crypto scams. Kevin O’Leary had to testify in front of Congress for his participation in one of the greatest frauds that the world has ever seen. 

Frankly, Silicon Valley VCs have always admired liars and scammers. But over the last two years fraud has crossed the chasm between something that only criminals do, to something that is normalized in today’s culture. 

Fraud has become a hustle culture in startup scamming

These days it is crucial for any startup founder to be able to recognize common scam techniques. Scammers create a false sense of urgency, use intimidation or fear, and often present themselves as reputable members of the innovation ecosystem.

Scams are always evolving, but here are some classics to watch out for: 

Fake Broker Scams: Scammers pose as brokers or intermediaries who can connect startups with potential investors or grant programs. They usually request a fee for their services and a commission on the funds they promise to secure. Once the payment is made, they disappear or provide no actual assistance or connections.

Advanced Fee Fraud: Perhaps the most straightforward yet ‘effective’, this scam involves asking for an upfront payment before the service is provided or the money is “released.” This could come in the form of a small fee to unlock larger funding amounts, payments for “due diligence,” or other administrative or processing fees.

Equity Skimming: Scammers may offer to buy shares in your startup, only to siphon off funds through excessive fees or by undervaluing the shares significantly. They prey on founders who are desperate for investment and this can lead to you losing control over your company.

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Phishing Attacks: Often disguised as legitimate business inquiries, these attempts aim to steal sensitive information such as login credentials, bank details, or confidential business information. Phishing can also take the form of fraudulent invoices, where scammers pose as vendors.

Intellectual Property Scams: Startups, especially in tech and creative industries, should be wary of entities that promise to protect or promote their intellectual property for exorbitant fees, often with little or no actual benefit.

Fake Awards, Directories and Media: Your startup may be approached with the opportunity to be featured in prestigious directories, media outlets, or to receive an award, usually contingent upon paying a fee. These scams exploit your need for credibility and exposure.

False Mentorship and Advisory Schemes: Unscrupulous individuals may offer mentorship, coaching, or advisory services with exaggerated claims about their experience and influence. They charge high fees and/or demand equity, offering little valuable advice or connections in return.

Investment for Information Scams: In this increasingly common fraud, individuals posing as investors express interest in funding your startup. As part of the investment process, they request detailed financial information, including bank account numbers, supposedly to transfer the investment funds directly. However, their true intent is to commit identity theft or financial fraud. With your sensitive financial data, they can access your accounts, initiate unauthorized transactions, or use your identity for other fraudulent activities.

Fabricated Credentials for Board Positions: Individuals may approach your startup claiming to have impressive credentials, extensive industry experience, and valuable connections. They offer their services as a board member or a high-level advisor, often in exchange for equity, a board seat, or high compensation. However, their backgrounds, experience, and networks are grossly exaggerated or entirely fabricated. Once they secure a position within your startup, they might use it to exert influence, gain access to sensitive information, mislead the company’s strategic direction, or even engage in practices that can damage your company’s reputation and finances.

Bogus Legal and Compliance Threats: Scammers impersonating government officials or legal entities might claim that your startup is in violation of certain obscure laws or regulations, demanding payment for compliance or to avoid fines.

Bounced Check Investment Scam: This is a particularly insidious scam where a so-called investor shows interest in your company and issues a check as an investment. Sometimes, the issued check is for a larger amount than the investment agreement, in which case the investor asks for a refund on the overpaid amount. However, after you issue a refund or pay for supposed expenses or fees related to the investment, it turns out that the initial check was fraudulent, and bounces. Not only do you lose out on the expected funding, but you also end up paying out of pocket for any refunds or expenses paid.

Remember, the key to protecting yourself and your startup from scams is due diligence. Research any individual or organization that you plan to do business with, and never rush into agreements, especially those involving upfront payments or sensitive information. Networking with other entrepreneurs and participating in genuine startup communities can also provide insights and warnings about potential scams.

The U.S. startup journey is tough enough without the added burden of deceit and fraud. By staying informed and cautious, you can focus on what truly matters — building and growing.

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