Investing in Tech Startups
While innovative technology startups are great investment opportunities, the profits generated by such startups are not always guaranteed; and neither is their success rate. Therefore, when an investor considers investing in such a startup, a wide array of factors must be considered from the expertise of the founder to the scalability of the startup.
Expertise and Skill Set of the Founder
Technology is dynamic and rapidly developing. Hence, startups need a founder who is capable of adapting the business as it grows. They should be able to use their skill set and expertise to create a sustainable business model in spite of market size. If the tech founder is inexperienced, even the greatest business idea will not flourish. Investors should therefore go for tech founders that have conducted vigorous market research on their product, and know their product inside out.
The Product’s Market Potential
The market potential of the startup’s product must be evaluated against the rapidly paced and changing environment. Thus, investors must look beyond the potential value of the startup and look at whether the startup can offer disruptive technology. Additionally, they should look at what competitors are doing and whether the startup can employ alternative means of success. Here are a few questions investors should ask themselves:
- What makes this startup different and unique from its competitors?
- What barriers exist that may prevent the startup from moving ahead of its competition?
- Why is this startup in business?
- Who are the customers of this startup?
- Which market segment does the startup service?
- What is the startup’s plan on entry and capturing of that specific market?
Understanding the Industry
This is important not just for the tech space, but also for all other startups. An investor must understand how the industry works in order to look critically at the facts and not be swayed by an excellent but void sales pitch.
The Product’s Ability to Troubleshoot
Products that are highly successful almost always solve a problem. While analyzing the problem that is being solved, an investor must do so objectively. While the problem may not apply to the investor himself, it does not mean it does not to other people.
The Burn Rate of the Startup
How fast will it take for the startup to use up all the money they have in capital? The faster it takes, the shorter the lifespan of the startup. Generally, it is preferable for a startup to have a one-year burn out rate, to ensure that it has enough time on its hands to focus on building the product and devising ways of beating competition.