Key Takeaways

• Startups are prime fraud targets: Fraudsters focus on small businesses because they’re easier to exploit. High-growth startups with fewer defenses are low-hanging fruit.

• Fraud prevention goes beyond financial loss: Regulatory failures, like improper customer verification, can lead to compliance violations and fines.

• Building in-house fraud prevention is costly and ongoing: Developing and maintaining a system requires continuous updates, engineering resources, and long-term investment. A hybrid approach is often more effective.

“There are fraud farms who are looking at you as a target. They are very aware of new companies — startups who have exposure. Those are the ones that have the fewest safeguards against the types of fraud they perpetrate.” — Carl-Alain Memnon, Co-founder of Grid

Fraudsters don’t ignore startups — they set their sights on them first. Sophisticated fraud networks operate at scale and can hit hundreds of businesses at a time, often extracting $50,000 to $100,000 from each, as Carl explains. He calls it a “volume business.” And small startups, with their lean teams and focus on growth, often lack the defenses needed to stop these attacks. 

For early-stage startups, the consequences of fraud can be devastating. While an established company might absorb a six-figure loss, a startup could burn through its runway or lose investor confidence quickly. This isn’t the only challenge smaller companies face — they also have to consider how to prevent fraud without adding so much friction that legitimate customers walk away. 

With Carl’s guidance, we’ll teach you what startups need to know about fraud threats, strategies to defend against them, and how you can balance security without sacrificing growth. 

Small Startups: The Fraudster’s Preferred Target

Small startups are particularly vulnerable to fraud — not despite their size, but because of it. “There’s no business that’s too small,” Carl warns, explaining that fraud has become a numbers game in which attacking multiple smaller targets can be more profitable than focusing on a single large enterprise. For fraud operations, startups represent the perfect target: digital, growing quickly, and focused on customer acquisition over security. Smaller businesses also generally lack the robust protection mechanisms of established companies. 

Fraud organizations operate with surprisingly sophisticated business models, where their cost per fraud is very low because they’ve built reusable infrastructure to attack multiple companies simultaneously. Bad actors prefer high-reward, low-resistance targets. And this efficiency makes even the smallest startups economically viable targets. Fraudsters are looking at these businesses as low-hanging fruit opportunities. As Carl explains, “You don’t have to put a ton of work into infiltrating or defrauding a small enterprise with very little protection.” Basically, being small doesn’t make you invisible — it makes you an easier mark.

The Early Warning Signs of Fraud Targeting

Fraudsters don’t launch full-scale attacks without testing the waters first. So, recognizing when your startup is being targeted is crucial for early intervention. The most common early indicator, according to Carl, is “a lot of traffic that does not end up in conversion.” This pattern often represents fraudsters probing defenses and looking for weak spots to exploit.

These reconnaissance activities help bad actors understand:

• How easily they can create fake accounts in your system

• Whether your verification process has gaps

• How much effort it will take to extract money without detection

Unusual traffic spikes followed by abandoned processes at specific points in your funnel should immediately trigger investigation. As Carl notes, “That’s an indication that you’re on someone’s radar.” High volumes of traffic attempting to enter your platform is particularly concerning, as this can “break something” through sheer volume. Bots overwhelming your system can degrade performance, disrupt user experience (UX), and waste operational resources. 

Carl says that monitoring these patterns requires vigilance and “understanding your customer base and understanding the bad actors that are trying to pass themselves off as your customer base.”

The Dual Threat: Financial Loss and Compliance Risk

Fraud isn’t just about stolen money — it’s about regulatory exposure, too. As Carl explains, “Your biggest exposures when you’re standing up any onboarding workflow are going to be practical fraud — credit loss —  compliance risk and the very real financial losses that can come from that.”

Here’s how this breaks down:

• Direct financial losses: Fraudsters exploit stolen identities, fake accounts, and synthetic fraud schemes to siphon money from businesses.

• Regulatory compliance failures: If a startup fails to properly verify customers, it risks severe fines under Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. 

It’s not enough to confirm who’s opening an account — you also need to verify who actually owns it. Beneficial ownership checks help prevent fraudsters from hiding behind shell companies or false identities. Failing to implement these safeguards can result in penalties that are just as damaging as direct fraud losses. 

Regulators are watching, and enforcement is getting stricter. Compliance is a critical piece of a startup’s fraud prevention strategy, not merely a box to check.

Biometrics are the New First Line of Defense

Basic identity verification isn’t enough anymore. Fraudsters are evolving, and so should your fraud prevention measures. 

“Where I always tend to go is biometrics,” Carl explains. “The IDV (identity verification) where you’re actually verifying, taking a selfie, and showing your ID.” Biometric authentication is a critical step, but even that is being challenged by deepfake technology. Bad actors are getting better at creating images and videos to bypass traditional biometric checks. If your system can’t detect deepfakes, you’re essentially opening the door to synthetic fraud. 

To stay ahead, startups need:

• AI-powered deepfake detection to flag manipulated ID files

• Liveness detection to ensure a real person is behind the screen

• Multi-factor verification for high-risk transactions

Fraud is an arms race. As security measures improve, fraudsters find new ways to work around them. This is why static defenses don’t work — you need an adaptable system that evolves with emerging threats.

Dynamic Fraud Prevention Without Killing Conversions

Fraud prevention needs to be strong, but it also needs to be smart. Too much friction drives away real customers, but too little lets fraud in. The solution? A tiered verification funnel that adapts in real time.

“Conversion is very important, which needs to be balanced in terms of fraud and understanding your customer,” Carl explains. Here’s how a dynamic funnel works:

• Top of funnel: Light verification (email, phone, device checks) to filter obvious fraud

• Mid-funnel: Behavioral analytics and transaction monitoring for flagged users

• Bottom of funnel: Full ID verification (biometrics, document review) before final approvals

This approach stops bad actors early without overburdening legitimate customers. Because fraud prevention should be flexible — not one-size-fits-all.

The Cost of Building vs. Buying Fraud Prevention

Startups weighing fraud prevention solutions face a key decision: build internally or buy external solutions. While in-house development might seem appealing for control and customization, it comes with significant hidden costs. “It takes a lot of time and resources to build,” says Carl. “I know that because I’ve built it. Our team has built it, rather.”

Building a fraud prevention system from scratch can take up to a year (or more) and requires extensive effort, including:

• Multiple vendor integrations for IDV, behavioral analytics, KYC/AML, underwriting and transaction monitoring

• Dedicated engineering resources to maintain and refine detection models

• Continuous updates to keep pace with evolving fraud tactics and conversion optimization

And fraudsters don’t stop evolving — so your defenses can’t either. “When you build, you’re always building,” Carl says. 

Most startups benefit from a hybrid approach where they leverage external solutions while keeping some internal fraud controls. The key here is finding a provider that integrates seamlessly into your stack without creating unnecessary hurdles. 

Fraud Prevention is a Startup Survival Skill

No startup is too small to be a target. Fraudsters look for weaknesses and move fast. You need more than a reactive approach to win against these bad actors. This requires proactive, scalable security measures from day one.

Startups that succeed at fraud prevention do three things well: they detect threats early, integrate compliance into their workflows, and use modern verification methods that adapt to emerging risks. If startups rely on outdated or static fraud prevention methods, it’s more than just inefficient — it’s a liability. 

Grid helps startups fight fraud dynamically — without heavy engineering work. It’s just one API and one contract. Schedule a demo today to fortify your fraud defenses while keeping your growth on track.