Considering investing in a disruptive tech startup?

Disruptive tech startups are where real innovation happens, but they also bring unparalleled risks. Skilled venture capitalist, see risk assessment as an art of balancing vision with reality. Beyond evaluating business models and market potential, one must rigorously analyze regulatory hurdles and the threat of technological obsolescence. The true differentiator, however, is the founding team's ability to pivot a startup’s agility can make or break its future. Deep due diligence isn't just a checkbox, it's the bedrock of positioning yourself for high stakes, high reward investments. In this realm, foresight and adaptability are your strongest allies.

Assess whether the technology truly has the potential to disrupt its industry. Is it a breakthrough, or merely an incremental improvement? Understand how it works and the unique value it offers compared to existing solutions.

You also need to consider proactive risk mitigation to enable you to make real and actual risks that could allow new innovations and those sweet multiples without having to take on high risks at “shot in the dark” level of uncertainty. This is usually done in value creation and portfolio management but also in looking way beneath the surface and the pitch deck

Furthermore, it's crucial to consider the timing of your investment. Investing too early might expose you to higher risks if the technology or market is not yet mature, while entering too late could mean missing out on significant growth opportunities. Assessing the startup's current traction, customer base, and revenue streams can provide insight into its scalability and long-term viability. Additionally, engaging with industry experts and seeking diverse perspectives can help refine your understanding of the startup's potential and ensure that your investment aligns with your overall portfolio strategy.

When considering investing in a disruptive tech startup, assess several key factors. Evaluate the startup’s innovation and competitive edge, ensuring it offers a unique solution to a significant problem. Examine the team’s expertise and track record in executing their vision. Scrutinize the market potential and scalability of the technology. Review financial projections, funding needs, and existing traction, including customer adoption and partnerships. Analyze the competitive landscape and potential barriers to entry. Conduct thorough due diligence to gauge the startup's readiness for growth and its alignment with your investment strategy.

This is not always valid though. Some areas are very new that it is hard to assess, let alone a market potential, but also a use case. Some technologies are stepping stones. Some are key stone. Others are other things…

When evaluating market potential, it's essential to recognize that disruptive innovations often create new markets rather than merely entering existing ones. The real challenge is not just identifying a sizable market but understanding how to expand it. Focus on whether the startup can redefine the market landscape, catalyzing demand where none existed before. This requires a visionary approach—one that challenges conventional assumptions and embraces possibilities that others might overlook.

Market potential and growth rate of the target market is one of the most aspects to decide for VC's whether to invest in a startup or not. For disruptive tech startups it is often difficult to estimate their exact market size potential. Some of the ways you can do a rough estimate is as follows: -Understand if they are creating a new market or targeting an existing market with an innovative solution. -Read Industry reports from Gartner, Mckinsey and other reliable sources of information which give a an estimation of the market size. -Go through the traction the startup has already achieved in the market and PO ( Purchase Orders) it has in pipeline. That can also help estimate market potential.

When evaluating a disruptive tech startup, focus on whether the technology is solving a large, existing problem. A real market need is key to success. Even the most innovative solutions won't thrive if they don’t address a significant, established demand. Concentrating on technologies that tackle big, existing problems increases the likelihood of strong market adoption and long-term growth. Revolutionary tech is great, but without a sizable problem to solve, its market potential may be limited.

Competition is not about features or resources. It is about the assumption and the core beliefs. A common question investors often ask is: What if other companies with more resources work on the same idea? All these market competitors hold resources, but the long-term outlier return with high failure risk will discourage most shareholders in these companies from getting involved at an early stage. The time commitment, the speed of execution, and the flexibility of arrangement with higher investment risk tolerance are all different from the secondary market shareholders' mindset. This small differentiation with the compounding effect of time will turn out to be a huge unfair advantage when we look back 5-10 years later.

When assessing a startup's competitive edge, prioritize technology that offers something truly new—something that hasn’t been done before. A strong competitive advantage comes from innovation that sets the startup apart in a meaningful way. Whether it's proprietary technology, a novel business model, or a groundbreaking approach, the key is to find something that disrupts the status quo. This kind of originality can provide a strong defense against competitors and position the startup to lead in its market.

For deep-tech and life-science startups, traditional financial health metrics like burn rate and early revenue aren't as relevant. These startups often operate for years without generating income, especially in fields like drug development, where a product must undergo extensive trials before approval. Despite having zero revenue, these companies can still be worth billions due to their potential impact and the value of their innovations. In these cases, the focus should be on the technology's promise and the startup's ability to reach key milestones, rather than short-term financials.

A successful startup will naturally present multiple exit options. If the company achieves its goals and demonstrates strong growth, you'll likely have the flexibility to choose the best path for realizing returns, whether through an acquisition, merger, or IPO. The key is focusing on helping the startup reach that point of success; once it's there, exit strategies will follow. The priority should be on building a strong, valuable business—exit options will come as a result.

Best way startup founders can leverage their investors is if they share experiences. Every founder needs to make their own decisions but having access to the experience of people that have been there and done that is sometimes invaluable. The areas where investors can help is introductions to people that can invest in the next funding round and intros to potential customers.