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By Devin Partida
Special to Financial Independence Hub
While investing in technology companies can be lucrative, it’s also risky. With great risk comes great reward, so the saying goes. However, not everyone has the luxury of risking their savings. Is there a way to maximize returns while minimizing risks?
Volatility is the Name of the Game in the Tech Sector
The COVID-19 pandemic was a catalyst for exponential growth. Venture capital (VC) activity set records in 2021. In the United States, VC-backed businesses raised around $329.9 billion, almost doubling 2020’s $166.6 billion in funding. Approximately $774.1 billion in annual exit value was created that year.
The potential for high returns is tempting, but this trend has slowed as peoples’ reliance on technology has waned. Startups are burning through their cash reserves. Those looking to make money from the tech sector should be strategic about their investments.
In the tech sector, volatility can make investors disgustingly rich — or cause them to lose everything. Technological advancement, driven by fierce competitiveness, happens fast, frequently disrupting the status quo. This allows unknown disruptors to rise to the top quickly.
Take DeepSeek, for example. A Chinese artificial intelligence company built an open-source large language model (LLM) of the same name to compete with ChatGPT for a fraction of the cost. NVIDIA stock — which has risen 285 times higherover the last 10 years — was down nearly 17% on the day this new competitor was unveiled.
Rumor has it DeepSeek was built for drastically less with subpar technology, which makes its disruption all that more consequential. While analysts expected OpenAI’s revenue would exceed $11.6 billion in 2025, it may not be so lucky. The AI companies dominating the market have just been undercut, affecting investments thought to be relatively safe.
How Rapid Innovation can lead to Substantial Gains
The tech sector thrives on innovation because technology goes hand in hand with modernity. The industry is also fiercely competitive, driving research and development. Continual reinvention provokes disruption, making this landscape fertile ground for dramatic, abrupt growth. Often, firms don’t have to fight hard to break into new markets.
Investing in a Volatile, High-Growth Sector is Risky
Market volatility won’t always work in your favor. Even industry giants — seemingly unshakable leaders — can fall to a previously unknown disruptor. Think back to DeepSeek’s impact on NVIDIA. Everything from changing market conditions to regulatory changes can quickly sour a strong investment.
Take Zoom, for example. Zoom didn’t see widespread adoption until the COVID-19 pandemic when it ousted Skype as the most well-known videoconferencing platform. Its share price peaked at $559 in October 2020. One month later, Pfizer and BioNTech announced a vaccine candidate against COVID-19. The next day, it dropped to $403.58. Since then, it has further plummeted, remaining just above $50 for much of 2023 and 2024.
Don’t let multimillion-dollar funding rounds fool you. Startups often have inflated valuations that reflect their future earning potential, not their current financial state. According to the Harvard Law School Forum on Corporate Governance, 75% of VC-backed startups fail. They may look good on paper, but failure is more common than selling or going public.
Many founders assume they can figure out revenue generation once they perfect their solution. Uber is an excellent example of this. This ridesharing and delivery app took about 15 years to make money. Despite being in the red for so long, its valuation was extraordinarily high.
Strategies for Mitigating those Risks before Investing
There is virtually no way to anticipate when disruptors will appear or how market conditions will change. Still, you can mitigate risks if you are strategic. Start by analyzing a company’s market potential. What is its earning potential? Is there a strong need for its products or services?
This firm’s financial health should also be a chief concern. Even the best, most revolutionary technology must deliver returns to be a stable long-term investment. This is why many stakeholders push for perpetual-growth subscription models.
Identify the company’s competitive advantages. It should have an unreplicable product and unique intellectual property. You shouldn’t justify an investment with “they did it first” or “they did it best” because a firm might come along and disprove those statements.
Think back to DeepSeek. Previously, the only thing stopping small businesses from competing with the likes of OpenAI, Google and Amazon was the tremendous funding required to develop an LLM. Now that this new, budget-friendly AI company has proven it can be done for less, the competition will become much larger and more cutthroat.
Will the regulatory landscape affect your investments? With Canada and the United States seeking to regulate solutions like AI at the federal level, there’s no telling how markets will react. Already, organizations like OpenAI are disobeying existing copyright laws. If regulators begin cracking down, their business model may evaporate.
You can Maximize the Gains if you Minimize the Risks
Investments can look good on paper but be disastrous in practice, and vice versa. Always do your due diligence before investing in the tech sector. At the very least, ensure you diversify your portfolio to disperse risk.
Devin Partida is the Editor-in-Chief of ReHack.com, and a personal finance writer. Though she is interested in all kinds of topics, she has steadily increased her knowledge of the intersection of finance and technology. Devin’s work has been featured on Entrepreneur, Due and Nasdaq.
