Critical Questions To Ask Before Investing In Tech
Each year, thousands of startups fail post-investment. Having being wooed during the funding round, investors find themselves backing a venture that simply doesn’t have the substance to survive the competitive conditions of the digital landscape.
As a result, many investors are being drawn away from tech products. Figures for the first quarter of 2017 (£938 million) were significantly less than those for Q1 in 2016, showing a reluctance amongst UK investors to take a chance with entrepreneurs touting the next best-selling app or software solution.
However, with the necessary insight and due diligence, investors stand to make phenomenal gains from investing in technology. As a cloud software consultancy, we often turn away concepts that don’t have the strength to make it to market. To help you audit your own opportunities, here are some key questions to ask before investing in tech.
What problem does it solve?
Investing in startups gives you access to a wealth of ventures claiming to be the next big thing. It’s tempting to back the most novel ideas, although we often find that the novelty factor soon wears out when there is no clear link to an unresolved problem that users crave a solution to. While a niche piece of industry-specific software might be less exciting, and relevant to a much smaller user base, the uptake is likely to be extremely high if it serves a genuine purpose or solves a specific problem.
How complex is the technology?
An entrepreneur may come to you with an original idea, but it’s crucial to peel back the layers and look at the technology behind it when assessing an investment opportunity. If it simply requires a little basic coding, then it’s going to be extremely easy to replicate, which leaves the venture vulnerable to competition despite potentially having first-mover advantage.
This is what makes emerging technology such an exciting space to invest in; while complex concepts and unproven business models inevitably come attached with more risk, the barriers to entry for competitors are much higher, safeguarding the market share of successful ventures. Uber is a perfect example; the concept of ordering a taxi from an app would have been unthinkable 10 years ago. Now, they’ve disrupted and dominated a global marketplace.
Is it community based?
Some of the world’s most popular apps have a social element to them. But, while the prospect of investing in the next Tinder or Facebook might be appealing, it’s incredibly difficult to build the sort of engaged community that keeps people coming back to these apps.
Building a following before the product launch requires a lot of effort. Tinder, for instance, wouldn’t be worth anything without its users, whereas a food delivery app has immediate benefits for the customer.
As such, be wary when exploring concepts that rely on a social community. The most reliable investment opportunities don’t depend on user volume to offer the functionality and experience users seek.
What’s the potential of and route to market?
Often the biggest challenge we see startups face is a clear picture of the product’s route to market. If this doesn’t exist, look for virality features in the product. Uber and Dropbox are great examples: their refer-a-friend schemes allowed the companies to rapidly scale their user base, giving them a fast and extremely effective route to market.
Are their figures watertight?
Every company up for investment should have a firm grasp of the numbers. This should take into account key metrics such as the cost-per-acquisition, the lifetime value of the customer, and the churn rate.
According to Equidam, average startup growth rates are 120% for the first year, 83% for the second, and 60% for the third. If prospects can meet or exceed these targets (supported by valid data), then you should sit up and take note.
Also look at the burn rate – the speed at which the initial investment figure is going to be spent. A £250,000 pot, for example, could be supporting a mean average spend of £40,000 every 30 days. That’ll lead to a ‘runway’ of 6.25, or just over six months.
Is the team capable of delivering?
Finally, ask yourself: who does the digital product rely on to become market-ready? Having faith in the person pitching for your investment is key, but it pays to do some digging into the team behind it. Do they have the correct skills in the team to make the product a success? By investigating the people you’ll be working with, you can approach the discussions with confidence in their capability to deliver.
Technology is still one of the most lucrative routes for investors, but not all digital products are created equal. Approach investment opportunities with these questions in mind to form a balanced view of startups that come your way, so you can sift the gold from the silver.