Avoid These Risky Investment Ideas (9 of 10)

The Startup Your Friend Suggested: What Traps People

In 2014, a group of investors one day poured $10 million into an app, whose sole purpose was to automatically text people “Yo?” As silly as that may sound, the app – appropriately named Yo – ran into a bit of a snag to determine its valuation.

It’s hard to pinpoint exactly the real value of the app and despite it being downloaded 2 million times, it was hard to tell if the market was really ready for this app. Today, Yo is not a public company with shares that trade nor has anyone even decided to buy the app company yet, which would’ve determined the value of it.

The big question in this scenario is why did so many people put money into this company? A lot of it points back to people recommending it.

The Dangers Of The Startup Your Friend Suggested

There is definitely a market for people investing in startups, however those who are sophisticated and have experience, know that there are odds of winning big one out of three times.

It’s why when you see people investing in startups, they’re typically diversified in that they invest in many at a time. They do this in a way that the one winner will offset the several duds that are in their portfolio.

This is the same with VC firms too. They have analysts perform deep research and lawyers looking over the fine print. They even go as far as sitting with the founder on several occasions to help them determine if the person running the startup is trustworthy and knows what they are talking about.

On top of that, if you do decide to invest, you’ll be paying extra due to the multiple rounds of VC rounds the company had to go through. That only jacks up the price.