Startup valuation trap and how blockchain fixes it

The startup growth illusion

Every startup dreams of scaling fast, dominating the market, and securing a billion-dollar valuation. Investors eager to find the next unicorn place massive bets on early-stage companies based on growth metrics, primarily user adoption, engagement, and retention.

But what happens when those numbers aren’t real?

In an industry where valuation is tied to perceived potential rather than immediate profitability, the pressure to inflate numbers is immense. Some founders see it as a shortcut to securing funding, a way to buy time until real traction catches up. Fake users artificially boosted engagement, and even outright falsified financials have become some of the worst-kept secrets in the startup world.

The problem is that, eventually, reality catches up. And when it does, the damage is spectacular.

JP Morgan Chase (NASDAQ: JPM) learned this lesson in the most painful way possible. In 2021, the banking giant spent $175 million to acquire Frank, a fintech startup that claimed to help students streamline the financial aid application process. The startup’s founder, Charlie Javice, assured JP Morgan that Frank had a thriving base of 4.25 million users, an impressive achievement in an industry notorious for slow adoption.

But the user base was a lie.

After the acquisition, JP Morgan ran a simple test: they sent marketing emails to Frank’s supposedly massive user base. Hardly anyone opened them. Suspicious, the bank launched an internal investigation and discovered that Javice had allegedly paid a data scientist to generate fake user records. What looked like a rapidly growing company was, in fact, a house of cards propped up by deception.

JP Morgan shut Frank down entirely. The bank filed a lawsuit accusing Javice of fraud, and federal prosecutors followed with criminal charges. Now, the once-promising founder faces years in prison.

This was not just an isolated case of one founder’s greed. It was another example of an industry-wide issue: investors making high-stakes bets based on unverifiable data.

In today’s tech-driven economy, users are currency. A startup’s valuation is often determined by how many people have signed up, how many engage regularly, and how much those users could eventually be monetized. For venture capitalists, a rapidly growing user base signals market demand and a chance for an enormous return on investment.

But when those numbers are fabricated, the illusion of success collapses. The fallout is felt not just by investors but by employees, customers, and even the broader startup ecosystem. The trust that fuels innovation is eroded, and legitimate companies are left scrambling to prove that their success is real.

Blockchain technology provides exactly that.

A blockchain-based digital identity system ensures that every registered user is uniquely verified, making it impossible for a founder to fabricate millions of fake accounts. Unlike traditional databases, where records can be altered or created internally, blockchain records are immutable. Once a user’s identity is registered, it cannot be changed or faked.

Self-sovereign identity (SSI) takes this concept even further by allowing individuals to control and verify their identities without relying on a central authority. Users authenticate their identity through blockchain-based credentials independently verified by trusted institutions. If an investor wants to validate a startup’s claim of one million active users, they wouldn’t have to rely on the founder’s word—they could check the blockchain and see the verified numbers for themselves.

Beyond identity verification, blockchain can also solve another critical problem: engagement manipulation. A startup could claim millions of users, but how many are actually engaging with the platform? Blockchain-based reputation systems record user interactions on an immutable ledger, ensuring that only real engagement that is time-stamped, verifiable, and tied to unique user identities counts toward a company’s valuation. This eliminates the possibility of artificial activity being used to inflate growth metrics.

For investors, blockchain presents a new paradigm. Instead of trusting internal reports or third-party audits, they can access a transparent, unalterable record of a startup’s user base and engagement levels. The days of relying on unverifiable claims could soon be over.

Not all blockchains can handle the level of scale and verification needed to make digital identity a reality. The BSV blockchain, however, is uniquely suited for this task. Unlike Ethereum and other networks that struggle with transaction speed and high fees, BSV is designed for enterprise-level scalability, processing millions of transactions per second at an extremely low cost. This makes it possible to verify users at scale without creating financial barriers for startups.

BSV is already being used to power digital identity solutions across industries, from banking to healthcare. The same technology that ensures data integrity in those fields can be applied to startup growth metrics, providing a foundation for valuations based on verifiable truth rather than manipulated numbers.

JP Morgan’s mistake was trusting numbers that couldn’t be verified. The next generation of investors and founders doesn’t have to make the same error.

By implementing blockchain-based digital identity solutions, the startup world can shift away from a culture that rewards illusionary growth and move toward one that values transparency. Investors will no longer have to gamble on numbers that might be fabricated. Startups focusing on real growth will be rewarded, while those attempting to deceive will be exposed before they can cause financial damage.

For too long, tech has operated on trust. However, trust is fragile, and as scandals like Frank’s have shown, it can be easily broken. The future of startup valuations isn’t about believing in the numbers—it’s about verifying them. And with blockchain, that future is closer than ever.

Watch: Why BSV blockchain is ‘absolutely perfect’ for Bitcoin startups