Investing in tech startups is no easy task. For every area of the technology industry, there are countless tech startups to select from. It is difficult to pick which are the best, but with a bit of insight into the trends of the industry, you can make the right choice. Of course, there is always the risk that you may invest in a bubble or be destined to lose money.
So, what do we look for when evaluating potential investing opportunities?
Of course location is key. Many investors like to see a tangible example of success. The more likely they are to make this type of investment, the more likely their management team and Board will prove successful. The best technology sector companies have a strong management team, office space, sales teams, marketing teams, and a well-developed product portfolio.
There is a great deal of risk involved when investing in startups and tech jobs. If it is your first time investing, your goal is to invest in a company that has a history of success, a solid business plan, a lot of capital (to absorb any eventual losses), and a board with highly seasoned entrepreneurs who can oversee the investment. The best companies will have already secured funding through angel investors and several a billion-dollar Series A.
Get into an investment fund
The best way to invest in these early-stage companies is to get into an investment fund. An ETF such as Tech Future Startups or Techton is probably your best bet for obtaining growth stocks in the technology sector. These types of funds all hold a single stock, so it makes sense that you invest in only one or two companies if you want to get a good return. You will not find many ETFs focusing on early-stage startups. However, if you have the stomach for risk, then these funds may be a good place to start. There are other types of investor-managed ETFs available to investors.
Institutional investors
One common type of investor is institutional investors such as mutual funds and insurance companies. You can find some great investment opportunities in this category as well. If you do invest in early-stage startups, you will likely be buying from high-net-worth individuals or corporations. Of course, you do need to beware of these investments as they tend to be more speculative and subject to wild fluctuations. Another downside to these types of institutional tech startups is their limited ability to write-offs due to their reliance on foreign investors. They also tend to have less flexible reporting requirements and quarterly reporting, which may deter them from making an aggressive first investment.
Venture capitalists
Venture capitalists are another group of investors who have shown a great interest in early-stage investments. The venture capital stage is often considered a high-risk endeavor; however, there is also a significant opportunity for large returns. When working with a private firm, you can expect that they will want to see a significant amount of upfront capital to conduct due diligence on your business idea. In addition to the investment capital, venture capitalists will require seed money and another financing as part of your package.
Private equity firms
Private equity firms are also an excellent source for investments in startups. These firms typically consist of experienced entrepreneurs who come to the business with some capital to operate as a private equity partner. These partnerships will provide you with a ready pool of capital to launch your company, so there is no pressure to raise capital internally. However, like venture capitalists, private equity investors have their limitations and have to meet a strict series of guidelines. In addition, these types of investors may not be willing to write off substantial portions of your capital during the earliest stages of your business development.
Finally
When working with a seasoned investor, you can expect them to offer you a significant amount of long-term financing that is usually based on a percentage of the business. This type of financing is much more difficult to obtain, but is also highly favorable. By contrast, beginning a search for an appropriate funding source without a series of rigorous due diligence requirements may prove to be quite difficult, if not impossible. If you’re serious about learning how to invest in tech startups, it’s important to understand that there are many options available and that some of them are much better than others.