5 Startups That Turned Out to Be a Scam

2025 has been an epic year for startups, mainly driven by AI technology and an influx of venture capital. A shift toward innovation and risk-taking has also, no doubt, been a boon. Besides, the appeal of entrepreneurship, coupled with inspiring success stories (such as OpenAI) from recent times, has led to massive hype surrounding innovative business ideas with high growth potential.

But not everything that starts with a huge fanfare delivers on its promises. Data shows that around 90% of startups fail due to flawed product concepts, poor cost management, ineffective leadership, and various other reasons.

Even worse, some of these businesses are purposely modeled on lies and exaggerations to mislead and defraud stakeholders.

The problem is, it’s not always easy to identify a fake website or a bloated claim backed by baseless data. Even experienced investors can fall prey to such swindles during startup investment frenzies.

So, what are the biggest startup scams that have made headlines the world over? Here are five you should know about.

1. Theranos

Founded by Elizabeth Holmes in 2003, the health-tech startup Theranos reached a staggering $9 billion valuation within just ten years. What was behind its extraordinary success? A proprietary technology that revolutionized blood-testing by enabling faster and more accurate tests using a small amount of blood.

But there was very little publicly available evidence supporting Theranos’ breakthrough technology. Surprisingly, this never seemed to bother its investors, patients, or business partners (Walgreens, etc.).

Then the unthinkable happened. A WSJ article raised questions about the credibility of the company’s claims. This resulted in a series of investigations and legal battles. Soon, evidence of test rigging, unapproved equipment, wire fraud, and other misdeeds began to emerge.

Ultimately, the once-admired business shut down in 2018, and Holmes and Ramesh Balwani (former company president) were imprisoned for fraud.

2. Builder.ai

Builder.ai achieved unicorn status by promising to build no-code software applications faster with AI technology. Set up in 2016 by Sachin Dev Duggal, the business became an instant sensation with its AI assistant, Natasha.

However, in less than 10 years, Builder.ai filed for bankruptcy, shutting down businesses in the U.K., U.S., India, and Singapore after creditor Viola Credit seized $37 million in 2025. But the signs of its collapse have been evident for years. Yet they didn’t deter Microsoft, Qatar Investment Authority, the World Bank’s IFC, and other major investors from pumping money into what they saw as a promising AI business.

Prior to insolvency, Builder.ai was grappling with debt, financial mismanagement, and allegations of revenue inflation. The most alarming revelations came from The Wall Street Journal, which reported that the business employed 700 “human” engineers from India to carry out the work Builder.ai claimed AI was performing.

3. Outcome Health

The Chicago-based health tech firm Outcome Health was set up in 2006 by Rishi Shah and Shradha Agarwal. Its business model was simple. Outcome Health offered advertising (primarily for pharma businesses) on TV screens and interactive tablets installed at the premises of healthcare providers.

The idea was innovative at the time and quickly pushed the startup to a $5.6 billion valuation. The business raised $600 million from heavyweight investors like Goldman Sachs and Pritzker by 2017. The two founders were featured on Fortune’s 40 Under 40 as well, with Shah making Forbes’ 400 Richest People in America list.

But suddenly things started falling apart: Some of the big investors sued Outcome Health, claiming it defrauded them by raising funds using false data. Investigations that followed revealed that its business executives had doctored advertising data and overcharged advertisers, swindling customers and investors out of over $1 billion.

4. The Honest Company

Popular actress Jessica Alba’s The Honest Company, Inc. was established in 2012 to offer baby, personal care, and home care products that are free of petrochemicals and other harsh ingredients.

The all-natural product lines quickly gained popularity among both consumers and investors. In 2014, the company raised $70 million-worth of venture capital, pushing its valuation to $1 billion. By 2016, its valuation was hovering in the region of $1.7 billion.

Then a WSJ exposé and other allegations, coupled with lawsuits, embroiled The Honest Company in sudden controversy. The accusations mainly centered on its marketing claims of being plant-based and having zero harsh chemicals, which evidence suggested were misleading. Eventually, the company agreed to settle two of the lawsuits in 2017, plunging its valuation below $1 billion. Today, it has expanded into a listed company, but its once-dishonest marketing tactics have left a permanent black mark on its name.

5. Nikola

Nikola came into existence in 2014, when Trevor Milton set it up to rival Tesla. The company went public in June 2020. Soon after, Nikola reached a valuation of $13 billion and announced that GM would acquire an 11% stake in its business. All this was achieved without selling a single car since its inception, suggesting the hype was based mostly on the potential demand for EVs.

By September that year, Nikola’s good fortune began to dwindle as allegations emerged about misleading public claims and marketing ploys. And in 2022, Milton was convicted of securities and wire fraud.

“Today's sentence should be a warning to startup founders and corporate executives everywhere — 'fake it till you make it' is not an excuse for fraud, and if you mislead your investors, you will pay a stiff price,” commented US Attorney for the Southern District of New York, Damian Williams, following the hearing.

To Conclude

The intense pressure to deliver results can sometimes blur ethical boundaries for startup founders. And when greed and overambition creep in, the result can be disastrous for businesses, investors, and anyone else involved.

The reality is, a large majority of startups don’t make it despite the hype. Some have short-lived stints due to blatantly unscrupulous practices.

This is why extensive due diligence is critical when pursuing high returns that many startups promise. If you are an investor, make sure the business plans are backed by verifiable data, the founders’ credentials are solid, and the product can address a real market problem.