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How to Avoid Fraudulent Companies and Reduce Risk in a Startup

How to Avoid Fraudulent Companies and Reduce Risk in a Startup

Not everyone is willing to take the risk of investing in a startup, but surely it can be a profitable venture when done successfully.  All of today’s giant companies such as Microsoft, General Electric, Walmart and Boeing all started out as small entrepreneurships, with little chance of success.  The owners and investors took a big risk and invested their time and money in the idea.  Startups are indeed a bet, but such bets can be made with far less risk if clients have the information they need.

Venture capital investment in startups had a major increase in recent years, achieving its highest level ever in 2017 with $148 billion USD. The solid expansion of the United States economy under the Trump Administration and its focus on job creation, led to even greater number of start ups, both domestic and foreign, trying to gain access to the U.S. market.  The strong U.S. economy has been a fertile soil for these businesses to start and grow steadily. The daily advances in technology, especially in artificial intelligence and other controversial fields, have also triggered the creation of new companies with a wide range of investment opportunities. But how can an investor be safe?

Certainly nobody wants to be in the position of the investors of Theranos, who lost nearly $1 billion USD after the startup founder was accused of fraud (now facing criminal charges). Being too credulous was the mistake that Theranos investors made, a mistake that is now a lesson for others.

How to reduce the risks as an investor?

Startups are new businesses. They are inherently risky with many unknowns.  There is no track record.  The great challenge with a new business is precisely that there is little background to hold on to, so the risk is greater. The operation of the company has barely started so there is not much information that can be gathered about it. However, investing in a startup does not have to be a blind jump.

Professional international investigators recommend conducting thorough background check investigations on the founders of startups, and to check if all the foundation is in order. The core of a startup is the people that began it, those who created the ideas and built the foundations. Verifying  the background of the person or people behind the startup is essential to understanding their motivations, their experience, and how reputable and trustworthy is their work.

It is as important to verify the identity or executives and founders of a start up, as it is to make sure they have the credentials they claim to have. Obtaining references from previous employers or business related contacts is also useful to understanding their reputation. Checking if they have been in trouble with the courts or media in the past is also key to knowing how safe the investment might be.  If someone was sued 5 or 10 years ago pertaining to business fraud or embezzlement, or bankruptcy, then it is critical to know this as an investor.  Knowing the facts leads to wise decisions.

Scaling too fast and too soon may be a sign of success, but it could also be a reason to dig deeper. Investigators recommend conducting a company background check and due diligence as well to make sure legal registration and operations are within the framework of the law.  Such in-depth investigations can reveal key evidence and facts about the founders’ backgrounds, the legal filing and operations, verify address and company size, obtain details on products and serves, reputation and more.

Startups are booming all over the world. Investing in one of them may be your chance to be part of the game-changers of the near future. Before taking a step further, speak with a professional private investigator about using company background checks and due diligence to improve your odds.  Don’t put your brand or hard-earned money at risk.  Contact us for a free quote.

C. Wright
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