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8 Questions to Consider Before Investing in an Up-and-Coming Technology Company

Written by Posted On Monday, 14 May 2018 06:10

The idea of investing in a budding tech startup is oftentimes romanticized. 

 

The reality? A vast majority of startups fail, and so few prove to be the overnight success stories we’ve become infatuated with. 

 

The odds that you’re going to land on the next Facebook or Apple are slim. That said, there’s still something to be said about taking a chance. There’s no great reward without some sense of risk, after all. 

 

Of course, savvy investors understand how to minimize risk as much as possible. That’s why we’ve outlined eight questions anyone looking to pump money into tech firms should strongly consider. Acting as a sense of checks and balances, having the answers to these questions handy could be the difference between cashing out or choosing a loser on the market. 

 

Does the Company Have a Track Record?

The tech industry faces many regulatory hurdles which means that up-and-coming companies absolutely must do business by the book. In fact, doing so should basically be the bare minimum for potential investors. 

 

Therein lies the challenge, though. New companies are often untested from a regulatory or legal standpoint. As highlighted by Facebook’s recent data scandal, it can take years for long-term problems to surface. As such, anything a company does to signal their sense of professionalism and security is a feather in their cap.

 

What Are You Looking to Get Out of Your Investment?

Although the ultimate goal of a positive ROI is a no-brainer, ask yourself what you need by the numbers to be happy with your investment when it’s all said and done. There is no “right” answer: this might mean a certain percentage of returns of some sort of profit-share. Either way, having a concrete number is mind will help guide your decision. 

 

What Does the Company’s Competition Look Like?

While the tech sector is indeed volatile, the nature of certain industries and niches are particularly cutthroat. Social networks and apps in particular are perhaps the most crowded in terms of new companies given their seemingly low barrier to entry. If your company in question has tons of potential competitors, it represents both a blessing and a curse. 

 

On one hand, a competitive niche signals that a company’s ideal is at least potentially profitable and likewise viable for investors. On the flip side, that also means there’s a chance your star company could get overshadowed by someone else. 

 

Is There a Potential for Major Acquisition?

Survival in the world of tech startups is easier said than done, with many up-and-comers getting bought out by the likes of Amazon or Google.

As a result, you should consider whether or not your company in question could potentially get gobbled up by a tech giant as well. While this question is mostly speculation, it’s one worth pondering.

 

Who’s at the Head of the Company in Question?

As part of investing in companies with a track record, spend some time researching the CEO and other big players involved in whatever company you’re thinking of investing in. For example, any company backed by former Google of Facebook engineers likely has both name recognition and talent behind it.

 

Do Your Principles Align with the Company?

This might sound obvious, but it’s difficult to fully commit a company whose principles don’t mix with your own.

 

While their product might naturally be beyond your wheelhouse, ask yourself: what personal or emotional stake do you have with the company in question? Is their product something that makes a legitimate difference? Is it person-centric?

 

Although these questions may not be directly related to dollars and cents, they do correlate with your ability to commit to an investment long-term.

 

What Are Others in the Field Saying?

Although investment advice from others should be taken with a grain of salt, it never hurts to see what fellow insiders might be saying. Not the be-all, end-all of your final decision, a bit of reassurance from a proven investor is always a plus.

 

Is This Your First Major Investment?

Understanding what kind of investor you are is key to making any sort of sound financial decision. For example, are you type of person who’s aggressive and hands-on or are seeking a more “passive” approach to your investments. If you’re the later, a high-risk up-and-coming startup might not mesh with your personality.

 

Again, there are tons of variables that factor into any given investment. This is especially true when you’re dealing with tech firms operating in a cutthroat, volatile market. By having the answers to these questions prepare before you invest a dime, you better poise yourself for a stronger ROI for your next financial commitment. 

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