Ignore Hockey Stick Projections

Technology startups often get an angel’s attention; especially if the idea is new and exciting with great team and market potential. Where entrepreneurs sometimes get in trouble, however, is when they promise so much more in revenue than their idea can realistically deliver. This tends to be a habit among entrepreneurs as a whole, but the blame isn’t entirely on them; they are, after all, just eager to please you.

Achieve $50M in Annual Sales

Scott Austin of the Wall Street Journal highlighted in his blog an interesting comparison. In its 10th year of operation, Oracle Corp. finally reached US$50 million in revenue. It took software giant Microsoft 8 years to accomplish the same goal. Surprisingly, many startups are projected to reach this lofty level within the first 5 years. According to Tableau Software, most technology companies don’t even come close in this timeframe.

This is not to say that it cannot be done. In fact, Tableau did rate the 100 largest, publicly traded software companies to determine how quickly they achieved US$50 million in annual sales within 6 years. Only 28% of these companies met this mark and the quickest was Novell, Inc., which achieved the target in just 3 years. It took Adobe Systems Inc. 6 years and Salesforce.com 5. You may not think they should be ranked higher than Microsoft, but consider the difference between those that are fast to take off and those that burn more slowly to achieve greatness.

Growth Dynamics Come with Risks

In order to realize any type of measurable revenue within the first 5 years, the company has to be able to drive growth. That can be a challenge in any economic market, and the recession isn’t helping the situation. As a result, companies have to take more risks than ever before in order to produce growth to achieve their financial goals. As the technology industry is dynamic and fluid, it runs rampant with threats, but also a number of opportunities.

Before making an investment in the technology sector, no matter how hot the idea or the market, you have to be able to ascertain the level of risk you are able to stomach as the company is on its path for sustainability. While this statement is true for any investment, it holds even more weight with technology firms simply due to the nature of the industry.

Key to Investing in Tech Startups

Technology moves faster than any other industry. At the same time, consumers are more finicky when it comes to technology, creating more dynamics and greater risk. The key is an entrepreneur who can pull together a team that can anticipate the threats and turn them into opportunities.

Like any other investment, technology is not always a sure-fire win and you have to assess the idea against the market. Even if both of these elements fit the bill but the entrepreneur and his team can’t offer enough to make it happen, you should walk away. After all, that magic mix that will be the next Google or Twitter may come in an interesting package, but the key ingredients still must be there to achieve greatness.