Four Guidelines to Follow for a Successful Technology Startup Investment

June 6, 2018

How to succeed a Technology Startup Investment to leverage a new Technology for your existing company?

Startups around the globe are partnering with firms that need the resources, talent, and solutions that only they can provide.

Here are four tips that investors can follow to make sure the process is as seamless and successful as possible.

For many startups, the most difficult part of the beginning leg of the journey isn’t finding the resources, people or inspiration to get the job started. Rather, it is determining how the products and services you provide fit into the greater business landscape. This is especially the case with tech-focused startups, whose offerings may be useful across myriad industry niches.

The retail and healthcare sectors, for instance, are constantly in need of advanced technology systems to help them keep pace with the competition, further their developments and improve their customer experience.

As such, many of them look for promising startups that can help fill that gap and meet those needs.

Whether the established relationship is one of outsourced partnership or a full-on acquisition is determined on a case-by-case basis. Still, there are four key guidelines to follow that can help make the investment process as seamless and successful as possible. Let’s review.

1. Understand the timeline

Investors looking to partner with a technology startup should understand that this process will work a little different than traditional acquisitions and mergers. The chief most important element of a successful partnership is knowing when to pursue an opportunity relative to the amount of risk it presents. In the startup sphere, this can be tricky, as jumping in too soon might leave an investor with a high degree of risk and little proven capability. Yet, waiting too long can be equally detrimental, as it allows time for competition to heighten and stakes to raise.

Understand that risk is inevitable, but in-depth research and analysis can help. For instance, an established consumer products provider might compare the costs of developing a technology in-house over time versus partnering with a startup that can provide it immediately. After considering the real costs of developing the technology itself, integrating it into their product lines, and distributing it across their sales channels, executives might realize that a small tech startup can provide the same level of quality at a lower price point, with more specific expertise to boot.

2. Ensure intellectual property

Before investing in or partnering with a startup with the intention to utilize the technology in your business, it’s essential to ensure that all systems and solutions are owned by the startup itself and that it has all of the usage rights to them.

Performing this IT due diligence is critical to ensuring that once the technology is integrated, you’ll be able to securely and legally access it. Take the time to review all licenses, royalties, agreements and other important documentation before signing on the dotted line. Yes, the technology may be very new and even untested, and you may enter into the partnership without having fully integrated it into your marketing and distribution channels, but idea ownership is key. When you can verify that the intellectual property isn’t compromised, it makes other steps, such as setting up the finances, infinitely easier.

3. Work with the development team

The technology you’re acquiring didn’t build itself. A talented group of developers are behind it and, especially if it’s still being developed and tweaked, you’ll need to include them in the agreement. This might mean establishing retention agreements to allow the team to move over to your company. Or, you may decide, in partnership with the employees, that it’s easier to let them work on their own, apart from the day-to-day hustle and bustle of the workplace.

Whatever setup you decide upon, ensure that the team is recognized for its role in the process and that the talent behind the technology doesn’t get lost in the shuffle.

4. Consider a payment mechanism

There are certain, strategic costs associated with acquiring or partnering with a technology startup. If, during the negotiation period, the valuation gap keeps widening and the level of risk appears to rise, consider establishing a creative payment solution, or earn-out solution that can keep initial costs low while incentivizing and rewarding quality work from the startup itself.

These are often performance-based rewards that center on the startup achieving a certain goal or meeting a specific metric. When that happens, monetary rewards are provided. Thus, a large-scale company might acquire a smaller one at a lower valuation rate, with the understanding that if certain conditions are met (such as a sales quota), then that amount will be raised over time.

Ultimately, the process of partnering with a startup can and should be a rewarding one for both parties. The key to establishing a successful working environment simply lies in performing the correct research, focusing on the right priorities and staying flexible and open to ideas and possibilities throughout the process. When this balance is achieved, the result is a long-term win for everyone involved.

Courtney Myers is a professional writer and tech enthusiast with more than 10 years in the digital marketing industry. From content creation to startup support, she’s helped dozens of companies find their voice and footing.