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What you need to know about investing in tech startups

There are plenty of innovative technology startups out there offering incredible opportunities for investors. Despite this, the profits generated by such startups are not always guaranteed, and neither is their success rate. Thus, when an investor thinks of investing in these startups, a wide array of factors will need to come into play. These include the expertise of the founder as well as the scalability of the startup. Figuring that out may seem like tedious work, but it is much better than burning your money in a startup that will prove to be unsuccessful.

Expertise, Network and Skill set of the Founder

Technology grows at a lightning fast speed. Therefore, the startup needs a founder who is capable of growing and adapting the business with the changing times. They should be capable of using their skills set and expertise to create a sustainable business model regardless of the market size of the business idea. A great business idea will definitely die in the hands of an inexperienced tech founder.

When looking at this, go for tech founders that have conducted vigorous market research on their product, and that have a wealth of experience and knowledge in terms of their board members.

The Product’s Market Potential

As stated earlier, technology changes at a very fast rate. The market potential of the startup’s product must thus be vetted against these rapid paced environments. Thus, look beyond the potential value of the startup once it succeeds. Go deeper and look at whether the startup can offer disruptive technology. Additionally, look at what the competitors are doing and check whether the startup can employ alternative means of succeeding. Ask yourself:

  • What makes this startup different?
  • What makes it 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 startup’s customers?
  • Which market segment does the startup service?
  • What is the startup’s plan on entry and capturing of that specific market?
  • How long will the entry and capture period take?

Understanding the Industry

This is important not just for the tech space, but for all other startups. An understanding of how the industry works will help you look critically at the facts and not be swayed by an excellent but void sales pitch that only sells you the hype.

The Product’s Ability To Troubleshoot

Products that are highly successful almost always solve a problem. While analysing the problem that is being solved, do so objectively and not subjectively; maybe the problem doesn’t apply to you but this does not mean other people do not experience the problem. This, however does not also mean that you should follow the crowd and avoid taking an objective look at the product, even if it is much praised by well-known people.

The Burn Rate of The Startup

Just 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 the startup will have. Generally, it is preferable for a startup to have no less than a one year burn rate, to ensure that it has enough time on its hands to focus on building the product and devising ways of beating the competition.

To Sum It All Up

Startups that are internet-based present extraordinary possibilities, but the risks involved are also many. By looking carefully at what you are getting, you will be able to sift through the many and find the few ones that are worth your money.

Author Bio

Kenneth Hogrefe
Kenneth Hogrefe is a Danish entrepreneur living in Angola. He's the CEO and founder of Tech Africa Pte. Ltd, a Venture Capital supported tech company focused on African online classifieds, as well as the owner of rapidly growing property and automotive classified websites in Angola: AngloCarro and AngoCasa. He writes... More