Internet tech startups currently represent some of the most popular investment opportunities. Even so, the lucrative profits offered by such startups are certainly not a given, and not all tech startups will succeed. When analyzing prospective tech startups for investment purposes, investors must consider a broad array of factors, ranging from founder expertise to the growth potential and the market itself. While the process might sound time consuming, it is a must for choosing startups with the most potential for becoming the next big thing. (For related reading, see: 5 Questions to Ask Before Investing in a Startup?)

Founder Experience, Skill Set and Network

In order to succeed, tech startups must be able to adapt and grow at lightning speed. Therefore, they need founders with the skills and experience to drive that type of growth. If there is a magic formula to succeeding as a tech startup, it is the need to have someone at the helm with the ability to drive growth into a sustainable business model. Regardless of how great a product idea might be or the size of the potential market, the lack of an experienced founder can be the death toll of even the most promising tech startup. 

Ideally, it is best to look for an entrepreneur who has taken the time to conduct due diligence and research. Even a young founder can have what it takes to drive sustainable growth if he or she has studied the market with vigor, and has brought knowledgeable and experienced advisors onboard.

Market Potential

Due to the rapid pace of the environments in which tech startups must function, assessing market potential is absolutely vital when vetting a tech startup for investment. Beyond the potential dollar value if the startup succeeds, it is important to determine the potential for disrupting the status quo of the industry. Additionally, prospective investors should consider approaches taken by competitors and whether the potential exists for alternative approaches to succeed. How is the startup's solution different? What unique value proposition does the company offer in relation to the competition? What barriers to entry exist that could prevent the startup from moving ahead of the competition? Why are they in business? (For more, see: Does Your Startup Need Venture Capital?)

Furthermore, who will be the customers for the service or product offered by the startup? What segment of the market does the startup plan to service? How does the startup plan to enter the market and capture that segment? Over what period of time will the startup be able to accomplish this? Answering these questions is essential.

Develop an Understanding of the Industry

In reviewing startups to potentially invest, it's important to make sure you have at least a basic knowledge of the industry and market. Otherwise, it can be easy to get caught up in the hype and have your decision swayed by a persuasive sales pitch rather than facts, and doing so can significantly increase the risk of your investment. Prior to investing any money, make sure you take the time to understand the industry.

Ability of the Product to Resolve a Problem

Wildly successful products generally must demonstrate the ability to solve a problem. Prospective investors should keep in mind, however, that just because the proposed solution does not resolve a problem they have ever experienced, that does not mean the problem does not exist or that others would not benefit from it. Analyzing tech startups should always be done from an objective standpoint rather than a subjective point of view. Even if the product or service proposed is not relevant to you on a personal level, that does not mean that it does not have the potential to succeed. (For more, see: Valuing Startup Ventures.)

On the flip side, it is also important to ensure that you do not simply fall into the trap of following the crowd. Simply because a large number of other people are investing or a well-known guru has praised a tech startup does not necessarily mean the company is a given to succeed.

What Is the Startup's Burn Rate?

How long will the money raised by the startup last? Determining the burn rate for capital is essential for ascertaining a startup's longevity. For instance, will the startup go through the cash raised in just a few months or will they be able to make it last a year or longer? Ideally, a startup should have a minimum burn rate of one year, preferably longer. The longer the burn rate, the more time the startup will have to focus on developing a competitive product instead of trying to prepare for the next round of funding.

The Bottom Line

Internet-based tech startups can present incredible potential, but they can also have high levels of risk. Ensuring that you know what to look for will make it easier to sort through the noise while selecting those startups with the best potential for success. 

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