Technology startups are in the news quite often, it is easy to tell when a technology startup has hit the news. It seems that within the same day news agencies are trumpeting about a new technology startup that is valued at well over a billion dollars. Many investors and venture capitalists are scrambling to put their money into these companies, but what are the risks? And, is it wise to invest in these businesses? The simple answer to the first question is that yes there are some significant risks to be taken when investing in a technology startup. And, investors need to remember that technology startups will undergo a period of intense growth in the future, so the valuation may well come down in a short period of time.
But why are there risks associated with these types of businesses? Many people believe that the only thing to be concerned about is a high price for the startup or the product or service that the company is going to offer. And, unfortunately, this may be true, but this does not always mean that there is something to be concerned about. Some of the biggest risks that are associated with technology startups stem from the industry itself. If the industry is growing strongly, then there may not be capital issues to worry about, but if it is slowing or if the market is shrinking rapidly then the market may not be capable of supporting the business. And, it is much easier to make mistakes in new businesses than it is in established businesses.
So, how do you know when to invest and how much to invest? This really comes down to the exact type of the business. For example, a software startup needs more resources than a media startup, but one could argue that a media startup may need more resources than a software startup. Therefore, it is really a matter of market size versus potential income. Of course, investors and venture capitalists want to know that the business will have a long and profitable life. Therefore, it makes sense to ask questions and learn as much as possible before investing your money.
One mistake that some investors make is trying to do too much before learning enough. It is a lot like taking a gamble by investing all your savings in the lottery. You may get lucky, but then you may also lose all your money. Therefore, it is very important to develop a good strategy for evaluating investments.
The most common mistake that investors make is not going to their local venture-capital investors and asking them what they think about the investment. A technology startup is still a high-risk investment, and there is still a good chance that it won’t pay off. Most investors will only tell you what they think, and that is probably all they will tell you.
The key to making smart investments is to go to multiple investors and understand each of their individual reasons for investing. Then, figure out how those factors are relevant to your own goals and objectives. In other words, don’t focus entirely on the financial rewards; focus on the business idea and the potential it has to create a large market. Only then should you invest in a technology startup.