The dangers of investing in startups and how to avoid them

With the booming success of certain social media platforms and online companies, we have managed to curate this perception that tech businesses are worth millions of dollars.

A whirlwind of hype has come to surround the idea of embarking on your own investment voyage in this industry, and many are latching on to the trend. But, as can be observed in the latest business pages of the newspaper, not every digital entrepreneurship is a success.

Companies like Facebook are not a cut-and-dry reflection of the entire tech
startup industry; they are a select example of a business that has managed to soar to great heights and as a result, drive exponential growth and wealth for its investors.

But if a business simply isn’t making profit, then there’s no way it can be sustainable. The end result? Investors lose out, while directors clean up.

We need to ignore the hype

The degrees of PR exposure circulating around tech startup businesses can be quite treacherous for naïve investors. We need to remind ourselves that the glamour of Silicon Valley does not always apply – particularly here in Australia, where the tech startup sector still pales in comparison to the US market.

It is imperative to overlook the borderline propaganda and harness real, grounded information. To make smart investments in this industry, you need to be realistic, and you need to do your research.

Make investments based on tangible successes rather than forecasted potential

It can be easy to be lured by data analysts projecting high levels of revenue and success for a tech startup, but these evaluations are not really based on anything truly palpable. A company’s potential cannot be accurately measured by conjectures; its successes should be apparent right here and now.

If, for instance, a company is taking all its money off the table immediately instead of waiting six months, this could be a good indication that your investment will suffer. Rather than looking towards the future, investors need to start looking at the
past: at a company’s proven track record.

Getting back to basics

To put it simply, I believe we need to return to the traditional ways when it comes to carving investment pathways in tech startups.

I think the whole industry needs to tighten up – these days, analysts commonly come up with figures based on theoretical data rather than a company’s track record, while the ASX continues to list companies that are making little to no profit.

The consequences can be highly detrimental for optimistic investors who are all too willing to throw their hats in the tech startup ring. What we need to do instead is look at the cold hard cash in the bank and make evaluations based on real revenue and profit rather than hype and potential.

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