How to tell if your tech startup of choice is legit?  

We’re living in the glory days of startups. 

There’s a startup for nearly every problem that needs to be solved. These small but fierce companies play a big role in the business ecosystem. One of the startups’ greatest strengths is inducing market competition and stimulating innovation, leading to economic development. No wonder there are countless venture capitals and investors looking for emerging companies with high growth potential to devote their money to.

But let’s put aside inspirational pitches, and instead of extolling virtues – get back to business. The key question is – how to invest in startups? It’s not an easy one, so we’ll take it slow.

The good, the bad, and the wisely advertised

The three above-mentioned don’t necessarily need to be mutually exclusive, but let’s not get ahead. 

Are the concerns about startup credibility even justified? Or are stories about unfortunate investments just urban legends?

Most probably you’ve heard about some breakthrough companies, offering complex blood testing from a single drop despite not having the actual technology for it, providing innovative home appliances to squeeze juices from premade packets in a revolutionary way, that could be prepared by hand and not cost $400, or smart cups so smart they could recognize the liquid inside them or count the times they were refilled. 

The above-mentioned visionaries are just some of the most flagrant cases, but there are many more examples of products that just weren’t worth it. There’s nothing bad with someone trying their luck with a product or service, unless it involves deceiving the investors and/or the public. 

How to recognize the real unicorn? Or: Which startup is best to invest in?

Aside from the question depicting an oxymoron of course. We don’t believe in unicorns when it comes to business. We believe in integrity and engaging in trusted, proven undertakings. 

startup invest tech startups

So, you’re serious about investing in tech startups and looking for an IT startup to add to your investor portfolio? Or do you already keep an eye on something? Assuming the emerging company operates in areas you’re familiar with, your risk is smaller. If the startup you’d like to invest in is from the medical field, its assessment requires experts with a medical background. The same goes for other areas, typically entailing at least some general understanding. 

When you’re looking for a startup to invest in, don’t follow the hype or a temporary fashion. Sure, if it’s digital solutions that you fancy, the field is dynamically changing. Still, your hard-earned money should rather be put to good use after some analysis and consideration.

Hard questions need to be asked. A startup pitch is fun and catchy, crafted to allure and stun. What we’re looking for is a down-to-earth, merit, and rational evaluation of what really is going to happen and what are the facts behind the idea. 

If the startup of your interest plans to conquer the IT scope, your envoy should be someone familiar with digital technology. IT suffers from a lot of hype and buzzwords, but when you take a closer look at the actual stack and capacity – not everything is as it is advertised.

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Not all that glitters is gold

One of the common exaggerations is calling everything artificial intelligence. You might think that AI is everywhere. From your fridge and car through municipal bins and vending machines to all sorts of business processes. The trick is, often it isn’t AI at all. 

Many service providers use ordinary statistics and data analysis – if it’s sufficient and works for their product, good for them. However, labeling their offering with the most buzzing names, calling it BIG DATA and ARTIFICIAL INTELLIGENCE, when there’s no evidence of any advanced algorithms, is no different from false advertising of miracle diets or rejuvenating cosmetics with mysterious ingredients that in the end turn out to be ordinary vaseline. Maybe not so ordinary, since it’s packed in a fancy wrapper and advertised by a popular celebrity. Still, it’s a shell product – there’s not much behind all that glitter and great promises. Someone purchasing it for the promised spectacular results and extraordinary effectiveness would feel highly disappointed in the end, after discovering it’s not what they paid for. Crypto marketing, promotion, storytelling, and all other bells and whistles did their job right, but for the wrong cause. 

What we’re saying is that overpaying e.g. a cosmetic product by 20$ can be a letdown but misinvesting in a shell startup can be – you guessed it – a major disenchantment. When you’re an investor and on the lookout for a company to entrust your funds to, there must be actual technology and know-how following the marketing magic. 

Aren’t you much of a tech expert yourself? Consider a technical audit. Before splurging out on that new, innovative, disruptive technology send your emissary to ask around and verify the facts. 

Time to say: Check!

Or: objection! We’ll leave the choice to individual auditors. The thing is that a technical assessment is vital for a tech startup investment. Don’t let anyone put wool over your eyes saying “it’s too complicated”, “you wouldn’t get it”, “we’ll explain later, now we need the money to develop the solution”, etc. Technologies too complex to understand don’t emerge suddenly; most probably you’ve already heard about something similar and comprehend at least the general idea. 

While fireworks can work wonders in marketing, when it comes to spending large amounts, we need the startup to lay their cards on the table. It’s not that uncommon for the loudest, most attention-grabbing advertisements to cover the weakest ideas. Some good ideas, products, and services are quiet. The best way to invest in startups is to know what’s working under the hood. Startups investment opportunities require some time and consideration before you decide to go all in.

The things to verify:

A few topics to address before investing in startup companies.

Feasibility of the idea

Checking feasibility requires determining the viability, profitability, and practicality of the breakthrough idea. Has the startup analyzed all available data, conducted market research, and prepared projected income statements? In short, do they know where they stand? Sustainable development of business ideas calls for proper preparation and delivering tangible data for assessment. How to check it? Ask for Proof of Concept (PoC) and/or Minimum Viable Product (MVP) or subsequent “M’s” – MMP, MMF, MMR, MSP, etc. Delving deeper into preliminary product versions allows investors to see through the honeyed words. When you’re about to invest millions, it better really be artificial intelligence as promised. And not a bunch of apprentices working in the back, pretending to be the advertised algorithms. 

There’s even been a startup that hired actors and rented a lab to set up a believable show for investors’ visit at “their site”. After all, maybe those apprentices aren’t the worst that could happen? Still, that’s not what investors sign up for when spending their money. 

A working code

There are plenty of tutorials for startup founders and serial entrepreneurs that advise not to learn to code when building a startup. While this may work for non-technical founders and new companies aiming for other market fields, when it comes to tech startups – code is king. Can the startup handle the technical risk of their idea? Can the architecture be built and work as meant to? Is the code behind their project adequate to the advertised potential?

A common sin of startups is, again, those ill-fated apprentices or students assigned to write code. Code, that once the project is about to be commercialized, requires immediate rewriting to present any value in terms of further development, maintenance, or just ensuring stability and responsiveness for users. 

Potential for delivering the promised results

Do the startup founders have a growth strategy for their product or service? Is the idea developed well enough to work in real-life conditions? Can their product handle an increasing workload or is it sufficient only for test purposes? Investing in an idea that only looks good when the business model assumes an extensive user base is a risky move. Startup assessment requires checking all the things that could go wrong and not being able to deliver promises is a major sin to eliminate. 

In case you’d wonder, why should you choose us?

We’re a software company with over 12 years of experience and an extensive portfolio of executed projects. You’re here not to read our bragging, so if you’d like to learn more about our expertise, check the case studies tab. We may not be a startup ourselves, but having two of our own (Nsflow and Samelane), we know the tech field inside and out, meaning our auditors can recognize shams on the spot and help you with a business startup investment you won’t regret. We may not tell you outright where to invest in startups, but we’re positive about recognizing tech companies to invest in safely.

The takeaway

Don’t leave your business’s future to chance. Sure, honest mistakes happen even in the most proven and reliable cooperations. But a stitch in time saves nine, so if you have even the slightest doubt about whether a startup you’d like to invest in seems a tad off – an audit won’t hurt.