Looking for the next big thing: Tips for investing in tech startups

Image Source: entrepreneursky.com

 What do Facebook, GoPro, and Dropbox have in common? Apart from being recognizable names in their respective domains, all three companies started as small tech startups. Investing in the next big thing in tech is very risky, but the rewards are an irresistible allure especially for new investors: five to 100 times the initial investment.

First-time investors ready to dip their toes into the often-muddy waters of tech startups might find these tips useful:

Image Source: lerablog.org

1. Evaluating the risks. Startups returns could be huge if they succeed, but if they don’t, investors might not even get their initial investment back. Investors should evaluate their risk tolerance, financial capacity, and their investment style before committing to investing in a tech startup. For example, a conservative investor with limited capital should steer clear of this type of asset.

2. Sticking to the familiar. New investors in tech startups might want to consider choosing a company in an industry they’ve worked in. Being familiar with a startup's industry will enable an investor to see past the hype and make an informed judgment based on experience and operational knowledge. Those who still want to invest in a tech startup that’s outside their realm of experience should find co-investors with the experience and knowledge needed to assess.

Image Source: reviewbelief.com

Another way to minimize risk when investing in tech startups is by investing in more than one. Studies suggest that 10 to 20 holdings are enough to statistically decrease the risk of loss.

Tony Hartman, a Denver, Colorado-based business coach, is a respected authority on real estate investment and collateral-backed lending. For more discussions on early-stage startup investing, visit this blog.