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How to Avoid Startup Hype

If you are an investor looking to make money with a hot startup investment, you are on the right track. When it comes to possibly doubling, tripling, quadrupling or exploding your money, one of the best ways to do it is to invest in a startup. The great thing about technology startups is you don’t have to invest all that much depending on the stage of development the startup is in for you to see stellar returns in your investment in a relatively short period of time. Imagine investing a hundred thousand dollars on Google when it was just a small two-man operation. How about investing in Facebook when it was just an idea in Mark Zuckerberg’s head? Do you get the picture?

Startup investing has a lot more upsides for a relatively small amount of capital than downsides. With that said, it’s very easy to lose money investing in startups. Why? There’s a lot of hype surrounding technology startups and this hype doesn’t show any signs of slowing down any time soon. Just like with any industry, there’s going to be a lot of people that are looking to take shortcuts, misrepresent or just throw out a lot of smoke. While the incidence of fraud is relatively low compared to other industries, there’s so much hype and buzz that it’s very easy to invest in the wrong venture. If you want to invest your money in the right company and increase your chances of coming out a winner, it’s the best idea to avoid startup hype. Here are the top three ways to do it:

1. Learn how to read a business plan.
Instead of listening to your buddy’s excited and hyperventilating description of a hot up and coming mobile augmented reality service, read the business plan. If they don’t have a business plan, that’s a serious red flag. A startup that didn’t even put in a time and effort to put together a business plan is a non starter. I don’t care if you have only ten thousand dollars to invest or ten million dollars. If the company you are looking to invest in doesn’t even have a business plan, chances are it’s not serious and it’s not going to handle your money seriously.
2. Pay attention to the business plan.
The business plan is like the script of the movie that you’re about to watch. If wit and well enough, the business plan should answer the key question that you should be asking yourself about the company that you’re thinking of investing in. The question being “Is this company going to make money?” While it’s true that only a small fraction of startups ever end up making money and of those even a smaller figure end up becoming really huge companies, the truth is every startup should have a chance of making money. If you read the business plan closely enough you will be able to see whether the company even has a chance. There are many startups that really don’t have a chance of ever generating a revenue or profit that’s why it’s crucial that you read the business plan thoroughly to get a clear idea.
3. Can you understand it?
People who start up companies are always encouraged to come up with an elevator pitch. The elevator pitch is a company description that you verbally say to somebody and that you can complete by the time you start on the tenth floor of an elevator and leave on the first floor. In other words, if your company’s concept is good enough you can give an elevator pitch. In short, you should be able to summarize its value proposition in a short period of time. More importantly, it should be summarized in very clear and unambiguous terms. That’s the value of an elevator pitch. People starting startups are encouraged to have an elevator pitch not just because they’ll need to pitch the idea of their company to an investor but also because they need to be able to make the concept behind the company easy to understand. If you are an investor and you get the elevator pitch and it doesn’t make sense to you, then it’s a good idea to walk away. Never invest in companies that you don’t understand.

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