HIGH-TECH STARTUP: a layman's evaluation of its prospects
If you are not an experienced investor, but you are considering investing in a startup that seems promising to you — based on crowdfunding or a similar scheme — you are faced with the question of risk assessment. There are many aspects of this question, and all of them are important: there are legal aspects (How legal is this? How are investors' investments protected under different scenarios?), there are reputational aspects (Who is the owner? What is he known for?), and so on. If at least one aspect is questionable — the risks are greatly increased. The "weak link principle" works: in order for the project to be successful and for investors to receive their P2P income or the similar one, many conditions must be met simultaneously. Whereas to fail it is enough to meet at least one critical condition. And almost all of them are critical.
In particular, these aspects are economical and technological. The first one is responsible for demand: will the startup's services or goods be in demand and be competitive — even taking into account their expected price? The second is technical feasibility: does the startup's know-how and capacities really allow it to implement? Finding out how things stand with these two points is not an easy task; especially the second one, i.e. know-how and capacities. Nevertheless, you can make significant progress here as well, even if you are not a professional investor or a specialist in commercial intelligence.
Marketing specialists know that the businesses that satisfy a consumer's demand have the best chances for success. A demand that already exists, that is more or less realized by potential consumers, but is not yet satisfied or is poorly satisfied. And vice versa: attempts to "break into a tight market" are usually unsuccessful or require very large investments and a long time to reach the break-even point. The other extreme is also dangerous: if there are no competitors at all on the market, it can mean there is no market as such. That is, no one does it because no one needs it. Of course, there is an opinion that demand should be created rather than satisfied but startups usually can't do that for quite objective reasons; they don't have the resources to do it. There are a number of exceptions, but they are just exceptions, it would be rash to focus on them when evaluating the future of a startup.
1) Hence the conclusion: the best chances for success are those startups that work on young people, nascent markets. If the market is old and tight or if there is no market at all, the business will experience natural difficulties. For such a situation, its chances of success will fall.
It may seem trivial but it implies that those who "follow in the footsteps of the pioneers" are most likely to succeed. And those who follow them have lower odds. In evaluating the potential success of a startup, you have to keep this in mind. Can a layman take that into account?
He can, at least approximately. Search engines can help: if the number of queries (in different variants) on a certain topic is growing quickly and the number of documents found on those queries is also growing quickly — then the topic is promising, and its popularity is growing.
It should be understood that rapidly growing popularity of a topic is not a proof, but only a confirmation. That is, if a startup is working on a topic whose popularity is growing, that does not guarantee its success. It only shows that the startup is probably working, or is about to work, in a place where it has a high chance of success. On the other hand, if the opposite is true, the topic is not popular or if its popularity is falling, it makes sense to be more careful. The best situation is when the "takeoff" of a topic has just become undeniable — that is, when there is a high chance of continued growth (and, accordingly, not so much of its ending, especially fast one).
And what can be said about the technological part? Can a layman make any assessments of the project without being an expert in that particular field?
Strangely enough — yes, with certain reservations, of course, but it is possible. In particular:
2) If a startup uses hybrid know-how (expects to get a synergetic effect from combining two or three different approaches, principles, processes, etc., such that no one has tried to combine before) this is a good sign. Synergy often gives very good results; there are negative synergies (when instead of addition and multiplication you get minus, negative) but usually such things are noticed immediately and quickly rejected.
A very good option is when two technologies are "put together" in this way one is proven and known to be strong and the other is unexpected, new and also strong. A classic example is bitcoin, based on the principle of asymmetric encryption (an old proven technology) and blockchain (new and strong). Of course, it is difficult for a non-specialist to evaluate the "novelty and strength" of one of the components of the synergy — if at all possible — but the fact of "reliance on synergy" is not difficult to notice.
3) If a startup is based on some "old and abandoned" technology, this is also a good indicator. Many good ideas, inventions, developments, etc. that were ahead of time abandoned and were never continued only because they simply didn't have appropriate conditions: the necessary materials, markets, components, etc. Returning to them in the current situation may be prospective.
Photos from a century ago showing ladies on electric scooters illustrate this thesis well. And this is not the last example.
4) If a startup offers an analogue of already existing, obviously demanded goods or services — but with a fundamental advantage in price, compactness, speed, etc. — it increases the chances too.
This principle is at the intersection of the economic and technological aspects. A typical example is the success of the Japanese competitors of Xerox: as soon as they were able to produce their own similar devices (the patent situation has allowed it) — they immediately started doing it. Not full "Xerox" analogues, but small and cheap machines.
The Xerox machines were much better. But they were expensive and cumbersome and not every company could afford them. The Japanese met the above-mentioned ready demand at once. This was the basis for their quick, impressive success.
Again all of these four signs are not proof of a startup's future success. They only give grounds to believe that these possible chances of success are based on something, confirming the validity of its business logic. But if a startup can't boast anything like that — that is no such ideology, no such systematic approach — that's a serious reason to doubt its success.
Optimally, however, when a new project has all of the positive attributes: working in a young emerging market, betting on a positive synergy of technologies (one of which is "well forgotten old"), and solving an old problem with some important benefits of the new solution for the user. Such start-ups are worth looking at with special attention. Unless there is some other reason to doubt their success — the same legal, reputational, etc. They may be a good choice for investment.