Evaluating Technology Solutions From Startups
Investing in startups requires a healthy dose of curiosity. No matter what your background is, there’s always plenty to learn to be successful in this business. I understood this three years ago when I first decided to become an angel investor. Although I had a good background in technology and basic accounting skills, my knowledge and experience of business law and startups was lacking. To shore up my skill set, I reached out to those with more experience and asked a lot of “stupid questions.” I also worked directly with startups, even putting my own projects on hold.
Those activities have been helpful, but I ultimately decided to focus on evaluating the technology solution being offered and the future growth / profit potential from using it. For the most part, I outsource other critical due diligence tasks to people smarter than myself.
There is no exclusive list of questions that can be applied to every solution, but these are three questions that I would ask about any solution being offered by a startup:
1. Is it a better mouse trap?
One of the surest roads to profitability is creating a solution that provides multiple wins for potential clients: a superior solution to an existing need. That is one of the things that attracted me to DrChrono as an investment. They offer a great EHR solution for doctors and patients with features that save time & money. While most doctors will look at this product because they need to comply with new healthcare laws, the features will make their jobs and the work of their staff easier.
2. Is it user friendly?
Even great solutions will fail if the intended audience does not understand it or finds it difficult to use. Some founders get so focused on getting the solution to work that they forget the people who will actually use it. One company I recently invested in that understands this concept perfectly is Bionym. Their product seeks to eliminate the problem of remembering passwords by using your unique heart rhythm to authenticate who you are. Anyone who has ever had trouble remembering their passwords or dreaded changing it understands how promising this technology is. How much would you pay to never have to remember another password?
3. Do I understand how the solution creates value?
I don’t expect to understand every detail about the products offered by a start-up, but I should be able to conceptualize how it creates value and how it might be monetized. This question should be asked even if the company is already making money. Even snake oil salesmen can look like profitable businessmen with the right customers. Sometimes, answering this question requires the expertise of trusted people in your network. That was definitely the case when I had the chance to invest in Coinbase. Not understanding the value of this crypto-currency made me pass on the opportunity and I did not invest. I ended up asking the right questions and getting the information I needed, but did it too late. Still, with the limited knowledge I had at the time, not investing was the right decision to make.
It’s important to remember that even with the best strategy, losses from startup investing can be very high, so potential profits have to be large as well. Carefully examining the technology solution being offered is an important piece of the puzzle in deciding whether to go for it or wait for something better.
Neil is a technical trainer, author and consultant with expertise in operating system and application deployment. Microsoft Learning Partners use his courses to teach employees at Fortune 500 companies and government agencies technical topics such as operating system and SharePoint administration. He has advised companies on documentation procedures for new products and helped with beta-testing and choosing training solutions. He is also a FundersClub Panel Member. Full bio.