Investing in a startup can be incredibly risky, but it can also generate staggering returns if you pick the right company.

Take social media platforms like Snapchat or Twitter for example – how did their original investors decide that these would be good firms to entrust their hard-earned money with?

The return that they’ve received on their investment in these technology startups has been huge, thanks to them recognising something good and taking a chance with their money.

But how can you tell that a startup is worth investing in? Here’s our top five tips.

1. Its founders have a good reputation

Who are the brains behind the business? Is it someone you’ve heard of? What are their qualifications? Do they have a good reputation? How much thought and research and money have they invested into the startup themselves?

Image credit: iStock/ismagilov

This might seem like a lot of questions, but it’s important that you think about the answers to all of them before entrusting your money in their business idea.

If the startup you’re considering investing in has no strategy or clear plan of where it’s future lies and it’s been set up by someone with no business experience or qualifications, the level of risk associated with it will naturally be higher.

But then look at Facebook. Mark Zuckerberg set up the social networking site as a student with little business experience and today it’s a $12 billion company (£7.7 billion) that has just reached a record billion users in one day. Sometimes, you have to take a chance – but it is always worth keeping the above questions in mind.

2. It has little, or no, competition

For a startup to be a big hit, it has to be unique. Identifying a gap in the market and developing a product or service to fill it is what launching a startup is all about. If there had already been an app that let users send photos to each other before they self-destruct in a matter of seconds, Snapchat wouldn’t have been anywhere near as popular as it has become.

So, make sure you do your research. You might think the startup you’ve stumbled across is the perfect place to invest your money, but if there’s another similar product out there, it’s unlikely that it’ll be a goldmine in a few years’ time.

3. You can picture its future

Can you see how the startup will develop over the next five or so years? If the product or service that you’ve been presented with already looks polished and you can’t visualise where else it will go, it’s probably not the best place to invest your money over the long term.

Ask the founders if they have a development strategy in place – if they cannot tell you their business’ direction for the future, it’s probably not worth risking your money in their venture.

4. People are talking about it

Positive or negative, as long as people are talking about you, that’s a good thing – or so they say.

Two years ago, only a handful of people in the UK had heard of Uber – the app that lets you choose a taxi to book via your phone – but the yellow-label branded taxis are now an everyday sight on our roads and social media is full of mentions of the firm.

What’s more, the word ‘uber’ has even started to slip into conversation as a replacement for ‘taxi’ – the app is so highly talked about that it is guaranteed to expand further in the near future.

With this in mind, before investing in a startup, it can be invaluable to search for how many people are talking about it on Twitter, Facebook, Instagram, LinkedIn and in real life. Chances are, if no one’s bothered about it and it’s not been noticed yet, you won’t be receiving a good return on your investment anytime soon.

5. You’re confident your money will be in safe hands

All of the above points boil down to the fact that you need to know the money you invest will be in safe hands.

Therefore, it’s worth seeking professional financial advice before you part with your hard-earned cash.

At SFIA, we can offer you help and advice when you’re making a decision on where to invest your money so that you’re in with the best chance of receiving a good return on your investment.

If you’re not confident to leave your money in the hands of a particular startup, then don’t do it. Listen to your gut and if it doesn’t feel right, remember that the world is full of budding entrepreneurs and there is bound to be another venture for you to invest your money in one day soon.

Contact the SFIA team today to find out how we can help you keep your money safe.