Technology Startups: Everything You Need to Know About Investing in These Companies

We’ve all watched it unfold: a tech company starts out small, but in a few year’s time sells for billions of dollars. People become instantaneous millionaires. It’s the 21-century success story.

If only you could’ve seen it coming and have been a part of it.

As with any business, there are telltale signs that a startup has positioned itself for success. Sure, sometimes luck is involved or it’s just a case of people knowing people, but oftentimes, a savvy investor can tell from the start whether a company will make it or not. If you’re looking to get a piece of the action that a technology startup can bring, use these few pointers as a checklist:

Where to Look

A company can either be public, that is a company that offers stocks, or private, where it is owned by an individual or small group of people. Technology startups are unique in that they tend to stay private for longer periods of time than companies in other sectors, and can even be acquired by larger companies without ever going public.

The good news is that startups are always looking for capital, so even if it’s privately held, you can still invest in it. But you need to do your homework if you want to find one on the verge of success. Scour investment magazines and websites for rumors or possibilities, like this one from Money Morning about Apple seeking to acquire startups. These may not always pan out, but they can put you in a good position to make some money.

If the company you are looking at is public, then the health of the company maybe a little more apparent since you can check out stock statistics and watch the market.

Study the Founders

A company is only as strong as those that work for it, and no one is more important than the founders. After all, it’s their baby that they are guiding down the path to success, so you should try to learn everything you can about them.

If there is more than one founder, find out what you can about their relationship. How did they meet? Are they old friends or more recently brought together because of a common interest or monetary reasons? Have they worked together before? Oftentimes, a startup’s success hinges on the relationship the founders have together.

Even if the company was founded by one person, see what you can find out about them. What school did they attend? What do their friends and acquaintances think about them? Do they have experience in the field of their startup, or is this a brand new venture?

The answers to each of these questions can be the difference between making millions or throwing your money away.

Startup Capital

You would also be wise to find out where the startup capital has come from. Knowing how much money they have at their disposal can shed a lot of light on the health of the company.

If the company is venture-backed, then you should have no problem finding out the financial details. The information is usually publicly available and can be found fairly easily. If the startup is self-funded, then you should find out what the company’s plans are to continue funding and grow.

Never get into a venture where you are not 100% comfortable with a company’s finances. More times than not, a company with weak monetary health will not survive and you would be wise to avoid it from the start.

Invest Wisely

So you’ve found a startup you like, considered it’s financial health and you’re ready to pull the trigger and invest. There are a few things to keep in mind before doing this.

Remember that you may not see any returns for years. Startups are hungry for capital, so more than likely, everything will be put back into the business. Only after they start seeing reasonable profits do investments start showing returns.

Always have an exit strategy. With a public company, you can just sell your shares when you see the danger signs of failure. With a private company, however, it’s more difficult to bail, so look for ways you can liquidate your investment quickly if everything goes south.

And, like with any investment, never tie up more money than you can afford to. Nothing is worse than a “sure thing” that fails, taking your money with it.

Startups offer a great opportunity to make money, but you must do your homework first to be successful.

Liam Moore is a stockbroker who shares his knowledge with those just starting out in the world of stocks and shares, as well as those who are more advanced.