Ever since the Golden Era of the 1990s when online startups first began, venture capitalists, corporate investors, private equity providers and other gamblers, such as AngelList users, have tried to build riches by investing not just in internet startups but in companies supplying the infrastructure for the internet itself — infrastructure made of fiber optic cable, which allows data to be transferred at 25 times the rate of old internet cable.
Investors are currently funding businesses rolling out this technology into homes as part of the fiber to the-home broadband cable trend. Whether the financing is for an online company or technology, there are benefits and risks related to seeking fortune in Cyberspace.
Supporting startups with seed money and advice has been a popular partnership that benefits both investor and entrepreneur. When an entrepreneur comes up with a big idea for an internet launch, he often lacks both the startup capital and the experience to turn his invention into a full-fledged money-making commodity. By partnering with investors, the techno-entrepreneur benefits by getting both his money and advice needs met, thus improving his chance of success.
The benefits for investors are far greater. They stand the chance to make millions and even billions over dollars for years into the future. Not only do investors finance startups, but they also assume the role of mentor, grooming players, helping not only with the initial phases of the startup but with future phases during any public sale or stock offering.
In return, investors get a percentage of the company or stock options. More importantly, once the partnership is established, mentor-investors often stick with the entrepreneurs for future projects, through which they reap more dividends.
Not every investment partnership ends in riches, however. Startups run the gamut from purveyors of healthcare products to providers of new wireless technology and lifestyle internet blogs. Just what type of business will resonate with the world at large for a particular moment in time? No one really knows. A customer base is not guaranteed so money lent by investors could just as easily be lost, never yielding a profit.
Finding an audience has become more complicated than in the 90s and early 2000s when many online companies fed off the burgeoning lot of internet users exclusively. Now, online audiences are often not enough except in rare cases; thus, many startups are forced to rely on off-line audiences as well. The hunt for new audiences presents a tentative environment for success. Plus, an increasing level of competition has saturated the global Web with many similar startups, creating marketplace confusion and a lack of demand.
When deciding to invest, financiers also face the risk of aligning with a poorly run operation; they must be astute enough to consider whether a company’s founders and board members are astute and skilled enough to guide the new startup properly. Often, to combat the risk of inept company leadership, an investor may insist upon having a seat on the board.
Others risks include investors attaching to a startup that can’t gather enough backing from other lenders or startups whose products and services aren’t well-received enough to create sufficient company value. Even if a startup seems highly valued in its first phase of existence, its initial public offering (IPO) on the stock exchange might be poorly received and result in a great loss to investors.
The success of an Internet company can never fully be predicted. Some startups become a viral hit while others are dead on arrival to the global marketplace. Investors have to be content finance enterprises that appeal to them personally and perhaps offer fulfillment beyond financial rewards.
About the author: Carl Petoskey is a seasoned vet when it comes to investment topics. He has covered the industry for over two decades. When he’s not writing, you can find him reviewing internet for your business.