The tech industry has had its share of investment darlings – Google, Instagram, or Tumblr for example – that net big returns for investors. But those big wins aren’t the norm. More often it’s the case that investors in tech startups don’t ever see a return. Here are a few tips to help make sure your portfolio is balanced, minimizing loss risk and maximizing the potential for big returns.
1. Stick to What You Know
Successful angel investors will be the first to tell you they’re no different from anyone else. They read the same financials; have access to the same data. What may be different is that they tend to stick to what they know. If the majority of their business experience is in the telecom industry, they will tend to invest in telecom startups. The further afield from your area of expertise, the greater the risk of diminished returns.
2. Portfolio Approach
Instead of putting all, or even half, of your investment eggs in one basket, consider spreading your capital and investing in at least 15 tech startups. Regardless of how persuasive the pitch is, think about investing the same amount in each startup. This way you are limiting your exposure, increasing your chances of having an investment winner in your portfolio, and you’re better able to weather the likely potential that several of your investments will not pay a return.
In addition to the risky nature of tech startups, the maturity timeframe is long, averaging about eight years. Be ready to wait, and watch, and don’t expect a quick result. It can get pretty discouraging at times. Many companies face several crisis events before they make it big. Hang in there.
4. The Ten Percent Rule
Some believe that the reporting from the tech sector is slanted to the positive side of reality, often giving a false impression of startup success. In addition to very carefully assessing the risks in each potential investment opportunity, limit your tech startup investment to no more than 10 percent of your available investment capital. And, be prepared to lose it.
The stories like Google’s acquisition of YouTube or Facebook’s purchase of Instagram, are examples of just how big and successful it is possible for a tech startup to get. For every Twitter-type success story, there are hundreds and hundreds of broken hearts and empty bank accounts. Take just a few steps back, and a balanced, conservative approach, to make sure yours isn’t one of them.
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