Brilliant Business Ideas That Became Startup Scams and Lasting Scandals

If you've got a billion dollar idea on your hands, learning from the mistakes of these fraudulent founders could save your budding business, along with your reputation.

Every entrepreneur runs the risk of making poor business choices, and investing in a startup that fails can happen to even the most seasoned investor. No matter how brilliant a company’s vision, any startup’s fate often lies in the eager hands of its CEO.

As noted by Insider, “the road to the scheme starts with that one bad leadership decision.” But how does one spot the difference between investing in a budding startup and a scam? After all, many CEOs behind now-disgraced startups stand by their good intentions going in. But in the end, they couldn’t deliver on their big promises and their initial pitches quickly came back to haunt them. Oftentimes, brilliant business ideas evolve into a scam when their most groundbreaking claims don’t materialize. So be careful what you buy into.

Getting roped into an alleged startup that proves to be a bottomless money pit is the kind of mistake that most only make once, if ever. It’s not always easy to see that a startup is not really a startup, especially if they’ve already secured a fair amount of seed money. So how do you spot a trap disguised as an entrepreneurial opportunity? Unfortunately, there is no one-fits-all answer. But knowing what you might be getting into before you go all in is always key.

How Do You Know What A Startup Scam Looks Like?

While no two scams are identical, they do tend to have some notable commonalities. Given time, many startup scams prove themselves to be all talk. Still, their words can be convincing.

Much of the time, these schemes start out innocently enough. The big brains behind the operation may wholeheartedly believe in their vision. And so, they don’t see it as lying when they claim their company will change the world. They often believe in their big ideas, no matter how farfetched they may prove to be, and they’ll do what it takes to turn their lofty dreams into a concrete reality, with the help of their investors.

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Budding CEOs tend to cater to those who are investing in their vision, especially in the beginning. If the ones writing fat checks want them to make changes, sometimes CEOs bend to their will a little too much. Without their initial vision firmly intact, the company’s aim runs the risk of becoming unreachable and dismantled. Other times, the startup proves to be a scam from the start.

If you have a brilliant idea and require outside funding, you’ll likely have to compromise sometimes. However, don’t compromise your overall vision by not standing firm when it counts. On the flip side, if someone is asking you to invest in their vision, believing in what they’re attempting to do should not be the only selling point.

Potential Doesn’t Always Equal Profitability

Establishing a company’s potential investability is a complex process that always comes with risks. Perceived value is a real and investible thing, but it can be difficult to prove an aspiring startup’s true worth. With any startup, financial risks are higher when there’s no concrete proof of intrinsic value or capabilities. And there’s often no fool-proof way to know where the invested money will actually go.

That’s why establishing trust between a startup’s leader and its potential investors is crucial. Investors aren’t just investing in the company’s stated promises; they’re investing in the entrepreneur’s perceived potential. If they don’t like the way the company’s leader is doing business, they can pull their funding and faith in the startup without hesitation. For those who start to smell a scheme, the consequences for all involved can be massive in the long run.

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Word to the money-wise: look beyond first impressions. If a startup invites you to help them change the world but has yet to do anything significant, proceed with caution. Look into their track record with investors as well. Grandiose promises can sometimes be a red flag, especially if a company is primarily relying on outside funding to continuously move forward.

If you plan to invest in a startup or build a business from the ground up, do your homework. There’s plenty to be learned from the startups who’ve succeeded, but the most famous startup scams and fails in recent history can teach us just as much, if not more.

Elizabeth Holmes, Theranos

Elizabeth Holmes is the Founder and CEO of the now-defunct health care technology startup, Theranos. She reportedly received $1.1 billion in funding, primarily from Blue Cross Blue Shield Venture Partners and Fortress Investment Group.

While her blood-testing company is now considered “a fallen unicorn,” Holmes started out on top.

Theranos company logo
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Once declared the “the next Steve Jobs,” the 19-year-old Stanford dropout put all of her time and energy into a revolutionary idea: blood testing from home. By the time she turned 30, Holmes was declared the world’s youngest self-made female billionaire.

In theory, Elizabeth Holmes’ idea could’ve potentially saved people millions of dollars and time and would’ve only required a minuscule amount of the patient’s blood. But only in theory. Now one of the most famous startup fraud stories in history, you’re probably aware of what happened instead.

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The problem with her brilliant idea was that the blood testing kit didn’t work, not yet anyway. While her team continued trying to bring the idea to life, Holmes convinced investors that it was already up and running. But there is no fooling science, and the scientific community wasn’t buying her claims. Without tech to support Holmes’s claims, her vision was simply that. She proved unable to deliver on what she promised these blood tests could do and soon was deemed a societal pariah.

Now facing up to potentially 20 years in prison, Holmes continues to stand behind her claims and deny all charges. In her 2021 testimony, Holmes said she wasn’t trying to deceive anyone, nor did she defraud investors, doctors, and patients.

I wanted to convey the impact…I wanted to talk about what this company could do a year from now, five years from now, 10 years from now. They weren’t interested in today or tomorrow or next month, they were interested in what kind of change we could make.

Elizabeth Holmes, New York Times

Read More: 12 Richest Self Made Women in America

Adam Neumann, WeWork

Adam Neumann is the now-infamous co-founder and CEO of WeWork. Most notably, his people skills and charisma secured most of his money. “Mr. Neumann spent just 12 minutes walking Mr. Son around WeWork’s headquarters, prompting an investment of $4.4 billion,” per The New York Times.

WeWork office building located in SOMA district
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Reportedly, the startup collectively received $20.6 billion in funding from SoftBank, Benchmark, and Goldman Sachs. To this day, many who signed on say the startup itself was not a scam. The problem was, that the company’s viability didn’t stop Neumann from scamming those who got involved. Instead, its potential and prowess seemingly. encouraged his underhanded deeds.

In the beginning, Neumann often described WeWork as “the Uber or Lyft of business spaces” and “a physical social network.” That much was true. In fact, he didn’t commit major fraud to get his company off the ground because he didn’t have to. At the height of Neuman’s success, WeWork was valued at $47 billion. People believed in him and his truly innovative idea just as much as he did. WeWork was soon globally revered, but profitability was another story.

Gradually, the main problem with WeWork proved to be its CEO. Financially, Neumann continued running WeWork into the ground. He soon became a polarizing figure in the public eye and an untrustworthy entrepreneur for investors.

dam Neumann attends 2018 Time 100 Gala at Jazz at Lincoln Center
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No one was denying Neumann’s skillset, but his motives were quickly called into question. Fears that he was using his smarts to conduct shady transactions ran high and proved valid. Not to mention, he was spending tons of the company’s money in lavish, seemingly self-interested ways. Meanwhile, WeWork was bleeding billions of dollars on a yearly basis. This proved to be no coincidence.

Right before WeWork’s parent company went public, he was asked to step down in 2019. More shady dealings and not-so-noble business practices were soon brought to light. Today, the seemingly eccentric visionary who promised to build a company that would “create a world where people make a life and not just a living” is frequently deemed a “trickster” and a “liar.”

Neuman is no longer allowed to be a part of WeWork in any capacity, but he managed to walk away with over $1 billion in his pocket. Putting his knowledge of space to use once again, he’s now becoming “an apartment mogul,” according to the Wall Street Journal.

Trevor Milton, Nikola

In the business history books, Trevor Milton will forever be remembered as the founder and former CEO of Nikola, an electric truck company that was set to revolutionize the industry. He secured funding that totaled $2.5 billion from big names like Fidelity Management & Research Company, ValueAct Spring Fund, and Worthington. Unfortunately, every forward-thinking promise he made turned out to be made up.

At first, Milton secured deals with some of the biggest business motor companies on earth. He claimed his electric trucks could do things no other company could do, and some of the biggest names in the motor industry considered working with him. However, he misled investors about technical capacities and business prospects, and costly legal consequences soon followed.

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His fraudulent dealings were first brought to light by Hindenburg Research. The financial research company’s report was titled “Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America.” The list of scathing allegations against Milton proved lengthy. According to Hindenburg, Nikola had faked its tech abilities, even rigging demonstrations.

Of course, Milton may have believed all he pitched was possible. But like so many fraudulent founders, he was unable to prove it before his blatant lies were revealed to the public.

CEO of Nikola beside false claims
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In light of the scandal, Nikola came clean but stood by their claims of no ill will. Still, they were met with various lawsuits. Almost immediately, Miltonremoved himself from his self-appointed role as executive chairman. But his attempt to escape bad press proved to be short-lived. After moving on from Nikola, allegations against Milton continued rolling in. For instance, two women came forward in 2020, accusing Milton of sexual misconduct, both alleging they were underage at the time.

If we are to learn something from the case of this self-proclaimed “serial entrepreneur,” it might be the importance of assessing the character of those behind startups, and not just big promises. And blind trust is rarely good for business. This self-proclaimed “serial entrepreneur” is behind a string of failed startups and has reportedly betrayed countless investors along the way. So no matter how moving a mission statement is, always do your research.

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