Quora Answer: As an Investor, How Do You Assess the Technology of a Technology Startup?

The following is my answer to a Quora question: “As an investor, how do you assess the technology of a technology startup?” 

We assess it on the basis of its serviceable addressable market, which is the basis of its commercial viability.  This would tell us the exact demographic the technology is meant to service, and how the startup intend to reach that market.  Otherwise, they cannot prove that the technology is scalable to the degree that would make it attractive to any venture capitalist.  Since this is a technology company, the rule of thumb is that we are looking for around 10x revenue multiple range.  This means a 10x to 100x return on investment prior to dilution, and there will be dilution because between initial investment to exit, there are around three or four rounds of fundraising. 

The first major consideration is market timing.  Revenue does not exist in a vacuum.  There must be a context for the product or service, or there is no market.  Being ahead of the market is the same as having no market, and waiting is a cost.  This means the startup is not likely to achieve further funding for development work unless there is some change in the market.  This is a major factor in burn rate since the startup is in danger of running out of funds before it can generate revenue, with little chance to attract further funding. 

The second major consideration is that assuming the market timing is met, what is the rate of potential growth, that serviceable addressable market?  What we are looking for is something that addresses the grey market, a market demographic that competitors did not realise exist.  Famous examples include Airbnb, which exploited the unrealised value of the property market; Uber, which addressed the same with private hire; and Amazon, which shaped consumer retail habits.  This is what we are looking for.  These markets are international, and expansion into new regions and horizontal markets have a low cost threshold. 

In general, we prefer low market penetration in many markets to high market penetration in smaller markets.  1% market share in many regions has greater growth potential and diversifies risk as opposed to 10% market share in one region.  It is easier to grow the former than the latter.