Red Flags in the AI Startup Landscape: A Consumer's Guide

In today's rapidly evolving AI market, consumers face an increasing number of startups making bold promises about their capabilities. Unfortunately, not all of these companies operate with transparency and integrity. This comprehensive guide identifies key warning signs to watch for when evaluating AI startups, particularly in the generative AI art space, and provides strategies to protect yourself from potential scams.

Misleading Marketing Tactics

Comparative Claims Without Evidence

Many AI startups position themselves as "Better Than [Established Competitor]" without providing any substantive evidence or specific metrics. Some even go as far as explicitly crossing out competitor names to position themselves as superior alternatives.

If it was really better than Midjourney, it would be on the leaderboards of HuggingFace or other authorities in the space, not just bragging with no evidence. Also, notice the 6 fingers on the right side of the sign?

This type of marketing relies on the consumer's familiarity with established brands while offering no concrete proof of superior performance. Legitimate companies typically focus on their unique strengths rather than making unsubstantiated comparative claims.

"Lifetime Deal" Limitations

A common tactic involves prominently featuring "Lifetime Deal" offers with "Pay Once, Use Forever" messaging. However, examining the fine print often reveals these "lifetime" plans actually come with significant monthly generation limits.

For example, some platforms advertise plans with "Unlimited Usage" prominently displayed, but the actual terms reveal strict monthly limits on all but their most expensive tiers. Only after paying substantially more do customers actually receive the "unlimited" usage prominently advertised.

It’s also important to mention that “Lifetime” often doesn’t mean lifetime. Apart from scams and unethical business practices, you also have the possibility of the startup failing to find funding and disappear, the servers may go offline, the whole offering could be a rug pull. There’s plenty of examples of this outside the AI industry as well.

A general rule of thumb - it’s 2025. Lifetime subscriptions and memberships are gone. Even buying a movie digitally doesn’t mean you own it. No, really. Read about it here.

Red Flags in AI Startup Histories

Some AI startups claim to have been in the space for long periods, maybe over a decade, but these are often just claims that are unsubstantiated and written to gain your trust. The implication is that if they've been around that long, they must be legitimate.

However, doing your own research often reveals a different story. Tools like the Wayback Machine, domain registration data, and social media transparency sections can show that many of these companies were actually established just months ago. This highlights the importance of doing your own homework (DYOR) as anyone can claim longevity, but the data doesn't lie.

Subscription Traps: Documented Patterns

The Bait and Switch Model

A recurring pattern in the AI startup space follows this trajectory:

1. Initial Generous Terms: Offering "unlimited" access to attract early users

2. Gradual Restrictions: Implementing significant limitations after building a user base

3. Continuous Rebranding: Changing names to escape negative reviews when backlash occurs

4. Declining Service Quality: Reducing features and access while maintaining or increasing prices

Unlimited & Lifetime claims + comparisons to reliable products, framing them as inferior products. That’s a lot of red flags in one image!

This pattern has been observed repeatedly across the industry, where companies initially sell lifetime subscriptions with promises of unlimited access, only to later reduce this dramatically, creating significant backlash from users who had purchased under different terms.

Complicated Refund Policies

Deceptive AI startups often create deliberately complex refund policies designed to prevent customers from recovering their money when products fail to meet expectations. Watch for excessive restrictions, short refund windows, or requirements that make qualifying for refunds practically impossible.

Some companies will claim that all sales are final for digital products, despite consumer protection laws in many jurisdictions that guarantee refund rights regardless of product type. Others may direct customers through circular support processes that never reach resolution, hoping customers will eventually give up.

Consumer Rights Override Company Policies

It's important to note that in countries such as Australia, even if a company claims "no refund," the law trumps company policy. Under the Australian Consumer Law (ACL), "no refund" signs or policies are actually illegal because they mislead consumers about their rights. Consumers have a legal right to a refund when there's a major problem with goods or services, regardless of what a company's refund policy states.

Businesses cannot take away these rights by claiming they have a "no refund" policy or displaying "no refund" signs. Companies that operate internationally must comply with the consumer laws in each country where they do business.

This was highlighted in a notable case where a major digital distribution platform was fined $3 million for breaching Australian consumer law regarding refunds. The court noted that the company had "formed a view without Australian legal advice that it was not subject to Australian law," which was incorrect.

Knowing your rights is essential when navigating any digital business or service. Organisations like ACCC here in Australia can help you exercise your rights of and when companies try to suppress them.

Many consumers have successfully obtained refunds by citing relevant consumer protection laws and being persistent. In some cases, threatening legal action becomes necessary when companies refuse to comply with local regulations.

It's worth noting that consumers don't have to pay any costs to obtain remedies under consumer law, and these rights apply for a "reasonable period"—not just during a warranty period. No business can exclude, limit, or modify these rights, even if their terms and conditions attempt to do so.

How AI Startups Actually Operate

Many early-stage AI startups operate at a loss rather than as profitable businesses. Their primary strategy involves rapidly shipping new features to demonstrate progress, even if these features aren't immediately accessible to all users, particularly those on mobile platforms. This approach is designed to attract and maintain investor interest, as investors are primarily concerned with seeing continuous feature development and growth metrics.

In the venture capital landscape, there's a widely accepted understanding that only about 10% of startups survive beyond their first decade. VCs deliberately invest in multiple startups simultaneously, knowing that roughly 90% will fail. However, the returns from the successful 10% typically generate enough profit to more than compensate for the losses from failed ventures.

When examining customer service and business structure, there's a stark contrast between traditional business models and what could be called a rapid approach. Unlike conventional businesses that prioritize customer service and maintaining strong customer relationships, these startups focus more on quick feature deployment and attracting early users to demonstrate product potential.

There's often a significant discrepancy between reported user numbers and actual engagement. For instance, a startup might claim millions of users, but the actual engagement on their official channels tells a different story. The reality of user satisfaction and involvement is often much smaller than what public metrics suggest.

The Double-Edged Sword of Innovation

The artificial intelligence industry has emerged as one of the most dynamic sectors in the technology landscape, with startups racing to develop and deploy increasingly sophisticated tools. This breakneck pace of innovation brings both remarkable advancements and significant challenges, particularly for the end users who find themselves navigating constantly shifting platforms.

The pursuit of rapid growth and investor funding often creates a paradoxical situation—the very speed that drives technical innovation can simultaneously undermine the user experience that these tools are meant to enhance.

Rapid growth in an already lightning fast industry is essential to remain competitive however this same rapid growth can be incredibly damaging to the long term sustainability of the business and to the detriment of the customers. Image credit: Hostinger.

AI startups typically begin with a fundamental challenge: distinguishing themselves in an increasingly crowded marketplace. The initial development phase is characterized by extraordinary feature velocity, with new capabilities often deployed weekly or even daily. This pattern has been particularly evident across generative AI platforms, where rapid iteration serves multiple strategic purposes:

1. Market positioning: Establishing unique functionality to stand out from competitors

2. Investor attention: Demonstrating development momentum to attract funding

3. Technical validation: Proving the viability of underlying AI approaches

4. User acquisition: Attracting early adopters through novel capabilities

While this feature velocity drives innovation, it often creates a volatile experience for users. New features often launch exclusively on web versions, leaving mobile users who constitute a significant portion of the user base without access to capabilities they've paid for. This creates a fractured experience where different user segments receive dramatically different value despite identical subscription costs.

How to Protect Yourself

When evaluating AI startups, apply these protection strategies:

1. Research thoroughly: Check domain registration dates and company history through tools like WHOIS and the Internet Archive

2. Read the fine print: Note that "lifetime" deals often come with monthly limits that may not meet your needs

3. Look for independent reviews: Don't rely solely on testimonials featured on company websites

4. Be wary of "better than" claims: Ask for specific metrics and evidence when companies make comparative claims

5. Understand your consumer rights: Familiarize yourself with local consumer protection laws that may override restrictive company policies

Remember these 5 tips. Feel free to download this image or screenshot it in case you forget it. It can’t harm you to have it on you.

If you encounter resistance when requesting a legitimate refund, you can contact your local consumer protection agency, such as the ACCC in Australia, for assistance in enforcing your rights.

Final Thoughts

The AI startup landscape is filled with companies making bold promises about their capabilities. By understanding the common tactics used by less reputable companies and recognizing the red flags in their marketing, you can make more informed decisions about which platforms deserve your trust and investment.

Remember that legitimate AI companies will be transparent about their limitations, clear about their terms, and honest about their capabilities. Knowledge is power in the digital world, where many are looking to take advantage of less informed consumers.

This article incorporates information from public sources including SmallBusiness.wa.gov.au, Consumer.vic.gov.au, SA.GOV.au, Legal123.com.au, MacamietLaw, ConsumerAction.org.au, ScanlanCarroll.com.au, and CeriumNetworks.com, as well as information I have sourced myself and from other reviews I have done as well as unreleased documentation.

A special thanks also goes out to the Jawknee, Jeremy Ford, and the hacker known as ‘M’ for providing valuable insight which helped me create this article.