Investing in Tech Startups
Tech companies are notorious for generating a nice return for investors. Companies like Instagram, Nest, and Oculus Rift all sold to larger companies (namely, Facebook and Google) for millions of dollars. And guess who cashed in on those sales? The investors (and the founders, of course).
But not all tech companies are an Instagram or a Nest. Only about 50 percent of small businesses make it to the fourth year, and of the ones that do make it, only a small fraction of those go on to sell for millions of dollars.
So, how can you tell a successful tech startup from a failure? In the end, it comes down to doing your homework, getting to know the company’s founders, and trusting your instincts.
Here’s what you need to know about investing in tech startups so you can end up on the winning side of your investment.
How to invest in a tech startup
1. Do your research
You need to fully vet a company and its team before investing in it. That’s why research is the most important step to take before making any investment decision. It’s really two steps: researching the idea and researching the team.
Research the idea
A successful company does one main thing—solves a problem for a customer. That’s the easy part. Determining whether there really is a problem and whether this idea is the best solution is the harder part. Dig deep into understanding the market and the competitive landscape for the product or service, along with the target end user.
Answer questions like:
Who is the target user and why would they use this product over another one?
Is this a brand new idea or just an improvement on an existing idea?
How much is the product or service worth to the user?
Would you use the product or service yourself?
Is this a niche product or service?
How scalable is the idea?
Research the founders and their team
A great idea is just an idea without the right team to execute it. Spend time getting to know the founders and their team so you can determine how likely they are to drive the business to success. You want to work with a team that’s able to adapt to change and can pivot to a new idea without causing turmoil.
You also want to work with a team that has the same values as you. You’re going to be working with a company for years. Make sure you genuinely like the founders and their team and believe that they have the experience and drive to make their business a success.
2. Don’t invest in just one company
Diversifying your investment is key if you want to invest in tech startups. While this is good advice for any type of investment, it’s especially important for investors in tech companies because tech startups can be particularly risky. You don’t want to hang your hat on the chances of the one company you invest in going big. It’s better to invest less money in more companies to increase your chances of a high ROI.
3. Stick with what you already know
Going outside your expertise is risky for you and for the company. It’s hard to make good decisions when you’re unfamiliar with an industry. You’ll be a much more useful advisor if you invest in an industry you’re already familiar with. You will also avoid getting talked into making investments that go outside the interest of the company. Stick with what you already know, and you’ll be able to help a startup grow by offering your expertise and experience.
There are a lot of great tech startups out there that need capital to be successful. If you’re looking to invest, you can access hundreds of vetted projects by signing up as a member on Capitalraisingclub.com.