Crypto Scams: How to Protect Your Web3 Startup from Fraudsters and Fake Investors

Let us first of all state that most professional investors in Web3 are legitimate and kind people. But we need to be fair and transparent, too. At Thrilld Labs, we know that some startup projects and founders have noted and even fallen victim to shady investors. Likewise, outright scammers posting as angels or VCs can pose significant risks to start-ups.

We therefore put together an article to help start-ups be agile in the investment sphere, especially applicable in cases when investors reach out. We put together some research about fraudsters’ tactics and established due diligence guidelines via which projects can enhance their understanding of investors and, hopefully, mitigate some risks.

We urge Web3 projects and startups to always remain vigilant at all times, because even if you get burnt once, this can undermine the entire existence of your project.

So how can fraudsters and fake investors be tackled? Read on.
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The Role of Trust

Global open markets are a blessing, especially for Web3 startups. As Wood (2014) famously stated, the overarching goal of Web3 is "less trust and more truth," which applies to the growth of startups as well. Less reliance on third parties and intermediaries represents a fundamental shift, moving away from transactional trust in traditional institutions toward trust in technology, specifically Web3 technology, itself.
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Generally, Web3 can thus be understood as a 'trustless' system, offering new ways of decentralizing digital assets and reshaping the foundation for project expansion and ownership. Web3 enables peer-to-peer interaction between end-users, builders, and investors. However, despite the advantages of open and global markets and tech, human trust remains critical in many economic and social interactions, including within the Web3 ecosystem.
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The role of human trust in Web3’s business landscape cannot be understated.

For instance, exchanges, Web3 companies, and investors largely depend on establishing and maintaining trust for the successful growth and operation of their projects, companies and services. These entities engage in business interactions across borders, in a global marketplace where value propositions can be championed or defeated, and capital can be garnered or erased in seconds [Overgaag, 2023].

The flipside of an open, global marketplace and user-centered ecosystem largely built on trust in the business sphere implies that potential scammers - in whatever form - may move around with ease and may identify prime targets rather seamlessly, be they retail enthusiasts or outright industry pros.

In an article titled “Telegram Scams: Fraud Schemes with Crypto You Should Know,” Yekatsiaryna Pshanichnaya-Kosowska dives into the susceptibility to scams faced by traders and companies on Telegram.  Yekatsiaryna writes “Telegram scams have proven to be persistent and effective [...]”. A few of the common Telegram cons that Yekatsiaryna elaborates on include Telegram bot scams, phishing scammers luring in new scammers, copycat phishing scams, fake cryptocurrency and NFT experts, fake technical support specialists, as well as cases where a scammer shares a supposed VIP group, job offers and interviews or they even pose as a journalist.

The creativity in scamming, however, is not only limited to Telegram, nor is it limited to Web3 enthusiasts or retail traders. On any platform, when building relationships, whether business or personal, it’s important to be careful with who you share sensitive or even seemingly sensitive information.
So what to do, you wonder?
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Identify Shady People Posing as Investors
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By practicing due diligence and carefully researching a purported investor, projects and founders can develop more secure and transparent relationships. First of all, remember that countless individuals seek to entice start-ups and projects with fictitious investment opportunities, promising significant returns. They may request substantial upfront fees or investments but vanish without fulfilling their commitments. Be cautious of such deals and thoroughly evaluate the legitimacy of investment proposals. If self-claimed investors push you, this is also a red flag.

In “Unmasking Fake Investment Offers,” Pan IIM Consulting Organization (PICO) explores the methods scammers use to reach startups. On impersonation, they note, “Scammers often impersonate well-known venture capitalists, angel investors, or reputable investment firms. They may create fake websites, email addresses, and social media profiles to appear legitimate.” So whilte tactics of these individuals may resemble those used by legitimate VCs and other professional investors, it's crucial to be vigilant and exercise caution. Non-legitimate investors, our outright scammers, may request substantial upfront fees for pitch opportunities, deck reviews, and accelerator/incubator access.

Alongside outreach through TG, in our experience in the Web3 space, LinkedIn can also be a potential route for scammers to find a target. In these cases, a scammer can create a fake investor profile mimicking an actual professional account. Be aware of the fact that potential scammers may have carefully established a base of credibility and maybe even a post engagement history, all carefully crafted and built over time, which can make potential victims more willing to take the counterparty seriously.
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Additionally, scammers may work through existing but fraudulent or illicit companies to deceive start-ups, sometimes by promising quick deals. They may promise funding in exchange for equity or other work, the latter not always legal.
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DYDD (Do Your Due Diligence)

We put together the following due diligence guidelines via which crypto projects on Thrilld and beyond can enhance their understanding of potential investors, mitigate risks, and make informed decisions regarding funding and partnerships. Clearly, it's important for founders to verify the authenticity of VC firms and conduct thorough background checks. How?

• Try to investigate whether the investor has an active online presence, such as a LinkedIn profile, a website, or a Twitter account. This helps in assessing their professional activity, interests, and expertise. Do note, in line with the paragraph above, that scammers may impersonate well-known VCs/investors by using fake credentials and stolen identities. They go to great lengths to gain the trust of start-ups.
  
  
• Don't forget to assess the reputation of potential investors. This includes examining their online presence, looking for any complaints or negative feedback from other projects, and requesting references from the investor. Reach out to entrepreneurs or companies that have supposedly received funding from the investor to gather insights and feedback.
  
  
• Somewhat connected to the reputational remark, projects should conduct research on potential investors' investment history and track record. In practice, this involves checking for past investments and gathering information on the performance or very existence of those investments. Utilize platforms like Crunchbase to access relevant data about the investor's investment portfolio, or ask around in your network.
  
  
• Projects should also ensure that potential investors meet the accreditation criteria, where applicable. Indeed, in some cases investors must meet specific financial thresholds, such as net worth, income, or professional experience. Depending on the jurisdiction, one can investigate if a VC or angel is registered with regulatory bodies like the Securities and Exchange Commission (SEC) or other relevant authorities. While this may require additional effort, it adds an extra layer of caution to the story at hand.
  
  
• Before signing anything with an angel investor, make sure to thoroughly verify the personal identity of potential investors (this is also needed for KYC and AML regulation, of course). This can be done by checking their official identification documents, yet be aware of AI’s capacity to mimic said documentation. KYC and AML regulations also of course apply to companies investing in the project, so make sure to do research as to where the funding is coming from.
  
  

Note that your due diligence should not stop once verification is completed.

• Carefully review the investment terms offered by potential investors. This includes evaluating the funding amount, the company's valuation, and the rights and responsibilities of both parties. It is advisable to consult with legal experts to ensure a comprehensive understanding of the terms and address any doubts or concerns. You want to avoid unclear or shady deals.
  
  
• Due diligence should be an ongoing process for projects. It is essential to continually review and update knowledge about investors and their activities. Stay vigilant and keep track of any changes that might impact the investor-project relationship. Cases are known where supposed investors work for months on building trust, after which detrimental breaches of said trust have occurred.
  
  
• At all times, excerise what we call "educated common sense". Listen to your instincts and exercise critical thinking no matter what. If a deal appears too good to be true or raises suspicions, dig deeper, ask questions, and seek independent (legal) advice when necessary.
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The Investment Process: "Don't Trust, Verify"

In another piece put together by our team titled "Dealing with VCs in the Web3 Space: a No-Nonsense 101 for Projects and Founders", we lined up the preliminary considerations when searching for the right VC and considered the most important need-to-knows in the Web3 investment process. It is, of course, important to state that variations in the investment process may exist depending on the VC firm's specific practices, the start-up's stage of development, and whatnot.

Also, do also note that pursuing VC investments is not always the best avenue for a project, depending on the nature of the company, its stage, and market conditions. Sometimes angel investments can be a better alternative, or one can decide to bootstrap or seek to generate revenue without injecting external capital.
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Overall, start-ups should thus always be cautious when talking deals and thoroughly evaluate the legitimacy of supposed investors and investment proposals. Keep this guide at hand to  recognize the patterns and routes scammers use.
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Finally, remember the words of Wood. "Don't trust, verify."

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Additional Resources and References

Alexandra Overgaag (2024). Web 3 Challenges: A Systemic Analysis. Concepts, Technologies, Challenges, and the Future of Web 3 (pp.474-495). IGI Global.

Wood, G. (2014). ĐApps: What Web 3.0 Looks Like

Thrilld Labs (2024). Dealing with VCs in the Web3 Space: a No-Nonsense 101 for Projects and Founders

Brennecke, M., Guggenberger, T., Sachs, A., & Schellinger, B. (2022). The Human Factor in Blockchain Ecosystems: A Sociotechnical Framework. In Wirtschaftsinformatik 2022 Proceedings (Vol. 3). AISEL.

Crypto Investment Trends, Web3 & VCs, Networking | Sarah Gottwald - Blockchain Founders Group

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Web3 Investor Scams Unveiled: Stay Safe, Stay Smart

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More victims of fake crypto investor scam speak to The Register
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<sup>Disclaimer & Risks

The information provided in this article is intended solely for educational purposes and should not be construed as a recommendation to buy or sell any security, cryptocurrency, or digital asset.

Thrilld Labs shall not be held liable for any investment decisions made or the acceptance of any investments based on the information provided in this article. Readers are fully responsible for their own investment decisions and should exercise caution and due diligence. By using the information in this article, readers agree that Thrilld Labs is not responsible for any financial losses or damages incurred.</sup>

^{Readers are strongly encouraged to conduct thorough research and consult with a financial or legal advisor before making any investment or acceptance decisions.}

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