A significant avalanche of startup fraud is ahead. Massive.

This has already started to happen in recent times with startups, but it will only increase in volume, magnitude, and audacity.

Fraud is now prevalent in the “new economy.”

Things will prosper when the likelihood of reward exceeds the likelihood of risk. This Inflection Point has been reached in the startup economy.

Here’s why.

Due to a combination of tremendous demand and low supply, the market is witnessing undoubtedly absurd values for startups in every sector. With no expectation of profit, common “normalized” valuations operate on a 20x multiple of revenue i.e. for a revenue of One rupee, a company can get a valuation of INR 20 . This is for unaudited, early-stage businesses.

Startups these days are creating a false appearance of Revenue by getting a client, supplier, or associated party to give their business One million and then passing it off as revenue, i.e. Income of One million. Then, they can reimburse the person (supplier, partner) for that One million by claiming COGS or other business expenses, etc. This practice is known as round-tripping. With the exception of taxes, it is essentially a zero-sum game (and the impropriety of it). It is relatively easy to set up. There are massively outsized upsides to this distortion of revenue given the current 20x valuation atmosphere (ie. fraud).

You can receive a 20 million valuation if you can show One million in revenue. Seems too simple.

This choice will grow more appealing if you are a startup founder who is scrambling for the next funding round with your back against the wall.

On the basis of this possible upside, you might even justifiably design a situation in which a “customer” pays 1 million or even 10 million to create income without even rounding up the amount. Think of the initial expenditure as an initial “investment.” Knowing that a 10 million investment will result in a 200 million valuation surge gives a good potential for growth.

In this environment, it is easy to see someone investing 10 million in order to gain 200 million.

To take an Example, a startup ‘S’ spoke to a supplier and they made a deal, The supplier would give the Startup One crore. The startup then makes a false claim that this One crore was his revenue and hence gets a Valuation of 20 crores. Now he can payback the Supplier

While 99% of folks are unlikely to consider this as a ‘choice’, there are enough crazies out there that would perceive this as a big invitation. People may be seduced into choosing this course of action out of malice or out of a need to save their business.

How to identify a Fraud Start-up

The possibility of fraud is a constant worry when investing in startups. There are some red flags to watch out for . They may help avoid dubious investments although there are anyway no definite assurances when it comes to investing.

1. They guarantee substantial returns with minimal or no risk.

2. They exert a lot of pressure on you to invest right away.

3. They decline to give specific investing information.

4. They assert to have access to assets that are not generally accessible to the general public or inside knowledge.

5. To access the investment, you must pay a charge upfront.

6. They exert pressure on you to conceal your investment.

How can you avoid being duped into investing in startups?

Fraud is a significant issue for startups. Many startups are operated by dishonest individuals who want to rip off investors. Here is how you can protect yourself:

1. Conduct thorough research

Always perform your due diligence before engaging with any startup. This entails investigating the business, its founders, and the sector. Gather as much information as you can about the Founders, the Employees, and the work culture.

2. Pose inquiries and be curious

Ensure that you ask them any questions you may have on the company or the investment. Be willing to press for clarification. If the founding members are reluctant to respond to your inquiries, it can be a warning sign.

3. Have everything documented

You and the business should always have written agreements. This covers both the investment agreement and any other contracts connected to the investment. This will give you some protection in the event of a disagreement.

4. Be wary of false promises

Startups frequently make significant promises to funders, but not all of them can keep them. Startups that make exaggerated claims about their offerings or future growth should be avoided.

Even after keeping all this in mind and watching for all potential red flags, one can still be sucked into this web of startup scams. To make sure you don’t lose all your finances, Make a variety of investments. Don’t put all of your startup investment eggs in one basket. To lower your risk, invest your money in a few different firms. This way you can be sure that you are safe no matter what curveballs come your way.