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Sergey Kartashov: How to choose an IT startup to invest in it



Sergey Kartasov (Sergejs Kartasovs) told how not to get lost in the ocean of IT start-up projects and choose the ones worthy to invest in them



27.Aug.20 4:25 PM
By Shawn Highstraw
Photo toinnov.com

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Sergey Kartashov: How to choose an IT startup to invest in it

Sergey Kartasov (Sergejs Kartasovs), CEO of Cyprus asset management company Generation Partners, told how not to get lost in the ocean of IT start-up projects and choose the ones worthy to invest in them.

Today, the intensity of investment growth in IT startups can be compared only with the speed of new IT startups appearing on the market. In 2020, the information technology market continues to grow. One of the distinctive features of the market is the "low investment - high profit" rule.

There are a great number of examples of how relatively small investments in IT have made it possible to obtain excess profits. A textbook case is Rovio that invested 100,000 euros in Angry Birds. Several years later, the profit from the game exceeded 57 million euros. Another classic example is Mike Markkula, one of the first Apple contributors. In 1976, he invested $92,000 in a promising enterprise. In return, Markkula received a 30% stake. After four years, his asset increased more than 2,000 times and amounted to more than $200 million.

Find the prize

However, not all promising projects meet investors' expectations. According to statistics, no more than 15% of startups show meaningful return on investment, and even fewer become consistently profitable. Determining which ideas will make a profit is a true art. To pick the wheat from the chaff, it is necessary to carefully analyze a huge number of proposals by the criteria that help with a high probability already in the early stages to predict the future of an enterprise.

‘When choosing a startup to invest in, it is necessary to assess a combination of factors, such as the host country, the age of the company, its income for the last year, whether there are other donors and who they are, and the total amount of their investments. The product itself, which the developers offer, should be innovative, undoubtedly useful and should solve a specific problem in a narrow area. This significantly reduces the level of potential competition, and makes the product much more expensive,’ says Sergey Kartashov, CEO of Generation Partners.

Diversify your portfolio

Investments in IT ideas, if you join them at the initial stage of their career, start from several tens of thousands of dollars. As a rule, the money is spent on organizing a workplace and salary to developers. For an average project, the chances of success are quite low, so diversification plays a serious role, explains CEO of Generation Partners.

‘When it comes to financing startups that do not have yet a finished product or a working business model, but only a rough business plan, it is worth resorting to diversification. Each startup of this kind has a high chance of remaining just a beautiful idea, but the profit from the productive projects is so large that the sum of all the deposits pays off due to the received dividends,’ explains Sergey Kartashov.

How to reduce your risk

When the investment amount exceeds $100,000, it is usually considered only finished products that have a much lower risk factor and require only additional financing for further development stages. You can also increase in the chances of success by assessing of the startup management, i.e. the entrepreneurial skill of their leaders, the analysis of their development, their business plan, the strength of networking and whether they have it at all, as well as the personal qualities of the leaders: whether they have fighting spirit, are they ready to go till the end and how well they can overcome hardships.

‘Separately, these factors have little value, only their combination works. You should use various tools and formulas to evaluate them. A comprehensive analysis of the startup’s strengths and weaknesses allows us to predict with a fairly high accuracy how it will develop in the future,’ notes Kartashov.

Angel investments

A separate type of investment in startups is the so-called "angel investment." In the modern world, it is gaining more and more popularity, and "business angels" have contributed in the formation of many modern corporations.

Distinctive features of such investments are project financing at an early stage when the risks of failing are relatively high, and it is possible to influence directly on the vector of the company's development. "Business angels" are kind of patrons who invest not in art, but in inspired startups and this way allow young developers to get the results.

A classic example is American entrepreneur Peter Thiel, who successfully invested $500,000 in Facebook in 2004. Already in 2011, his income, largely due to the shares of the largest social network in the world, exceeded $1.5 billion. In addition, Thiel remains a member of the company's board of directors, so he has an opportunity to influence the development of one of the most famous and successful corporations in the world. Stanford University professor David Cheriton, who invested $100,000 in the future business monster "Google" in 1998, hardly suspected that, years after, his contribution would bring him a billion dollars.

A lot of stories of the success of IT startups that later became world-famous corporations, have a true sense of risk and adventure. However, the modern fast-paced world has already managed to get used to such success stories and found patterns in their business formation. Blind faith in developer enthusiasm has been replaced by meticulous analyst work that allows to safely channel investments into new Facebook, Apple, and Google.






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