One of the technology industry's many strengths is its vibrant startup culture.
Technology startups are often recently founded and can be private or public. These small businesses are typically in the development or early implementation stages and are seeking funding from venture capitalists and angel investors to commercialize their products.
Some of the most successful tech startups include Meta Platform (NASDAQ:FB), Airbnb (NASDAQ:ABNB), Snap (NYSE:SNAP), Snowflake (NYSE:SNOW), and DoorDash (NYSE). It is now one of the most famous technology companies in the world. :dash).
The technology sector is highly volatile and investing in technology startups can be a risky venture, but getting into early-stage companies can be very rewarding if investors bet on the right horses. can be economically beneficial.
For example, someone who bought 589 shares of Snapchat's parent company Snap when it launched its initial public offering (IPO) in March 2017 had an initial investment of $10,013, at a value of $17 per share. It will be. As of March 12, 2021, that investment was worth a whopping US$36,924, which equates to a compound annual growth rate of 38.5%.
However, again, the technology sector is very volatile. As of September 7, 2023, with signs of a recession, the same investment would be worth half of its initial investment ($5,707). Tech stocks typically suffer during recessions, but they're also the sectors that rise the most when a recovery begins.
There are many technology startups to choose from in every aspect of the technology market. So it can be difficult to determine which companies are worth the risk. Here, Investing News Network breaks down how to invest in tech startups, from what to look for to how to get into the space.
What should you look for in a tech startup?
The harsh reality for startups investing in any industry is that 90% of these companies will fail within 10 years. However, investors can reduce that inherent risk by practicing serious due diligence. Among other factors, investors should look for companies with a clear identity, the potential to lead in a particular market niche, and a strong management team.
The technology industry can change so rapidly that it is imperative that companies articulate a clear vision of who they are, who they want to support, and who they are targeting as competitors. is. Technology is a tightly intertwined ecosystem, with many companies working together to create great end products. Without a clearly defined identity, companies can create confusion, and that's not a good thing.
But technology startups need more than just a clear sense of identity. You also need a bold vision of how you will impact your target market. For those considering investing in technology startups, the potential for market leadership is an important factor to consider. The first and best companies in a particular niche have a distinct advantage over other competitors.
Companies with innovative value propositions that target new areas of the market or needs unmet in existing areas are likely to become future market leaders.
Investors should also consider management as part of their due diligence. Look for a team of people who have a track record of building successful companies in the past and who can apply the models they used previously to your current company. Our balanced team brings together a unique and broad range of expertise that provides a competitive advantage and includes experts in the fields of finance, marketing and operations.
Investing in technology startups requires understanding the technology market
To know whether a startup is truly addressing a valuable but underserved niche in the technology space, investors need to understand the technology market itself.
According to Investopedia, the high-tech sector focuses on “products and services related to electronics manufacturing, software, computer development, or information technology” and “consumer goods such as personal computers, mobile devices, wearable technology, and consumer electronics.” It is included. and) television. ” It also covers business-to-business products and services related to enterprise software, logistics systems management, and the collection, protection, and analysis of critical data.
All of these business-to-consumer and business-to-business goods and services are so important to the global economy that it's easy to see why the technology industry is considered one of the most attractive sectors for investors. The main technology growth areas in recent years are social media, blockchain, cloud-based computing, fintech, mobile apps, Internet of Things (IoT), artificial intelligence (AI), medical devices, gaming, and cybersecurity.
The cloud-driven Everything-as-a-Service segment of the market is expected to perform particularly well. According to Fortune Business Insights, the global cloud computing market is expected to grow at a compound annual growth rate (CAGR) of 20% from 2023 to 2030, reaching nearly USD 2.43 trillion . This growth will be driven by innovation and widespread adoption of Internet of Things as a Service, Software as a Service, and Platform as a Service technologies.
Meanwhile, the company expects revenue from the AI sector of the technology industry to grow at a CAGR of 21.6%, reaching USD 2.3 trillion by 2030. The company explains: “With the introduction of ChatGPT, enterprises are now adapting to these AI-powered tools. These initiatives and implementations of AI technology are increasing the demand in the artificial intelligence market.”
Fintech is also a multi-billion dollar market. Market Data Forecasts predicts that the market value of this sector of the technology sector will reach approximately USD 324 billion by 2026.
Other top emerging technologies to watch in the near future include self-driving cars, natural language processing, bioinformatics, and 3D printing.
Enter a pre-IPO tech startup
By investing in a technology startup before it reaches the IPO stage, an individual gains ownership, or stock, status in the company and can sell it after the company goes to market or is acquired by a larger company. There is a possibility of profit. In most cases, much of a technology company's value is created at a private level before going public.
Investing in private markets can provide returns that are difficult to obtain by investing in publicly traded companies. According to management consulting firm Bain & Company, “Meanwhile, private market returns have outperformed public returns over all time periods, and alternative funds offer access to a broad range of global economies and all asset classes. “I'm here.” “These advantages explain why private markets continue to grow compared to public markets.”
But how can investors get in on the ground floor? Investors should look to angel groups and online platforms for early-stage investors. Investment expert Tim Lemke said online platforms offer investors a way to diversify their portfolios and support companies they believe in with confidence. He recommends companies like SeedInvest, Wefunder, Republic (founded by Angel List alumni), and Microventures (an early stage funder). of many top companies, including Twitter).
Technology startup venture capital fund
The biggest drawback of investing in private companies is the lack of liquidity. Unlike public shares in the stock market, shares in private companies cannot be easily traded or sold.
Another route into the tech startup market is to invest in publicly traded funds backed by venture capitalists. These venture capital funds provide exposure to privately held companies. Here are a few:
- Slo Capital (NASDAQ:SSSS)formerly GSV Capital, had Spotify (NYSE:SPOT), Dropbox (NASDAQ:DBX), Lyft (NASDAQ:LYFT), and Snap in its portfolio prior to their respective IPOs.
- Founded in 1972, Sequoia Capital (NASDAQ:SEQUX) We partner with early and late growth stage companies with a focus on the Internet, Mobile, Healthcare, Finance and Energy sectors. Some of the fund's most profitable exits include NVIDIA (NASDAQ:NVDA) and Instagram.
- First Hand Technology Value Fund (NASDAQ:SVVC) We work with technology and cleantech companies at various stages of maturity, from IPO to acquisition.
Private venture capital funds also provide investors with access to pre-IPO technology startups.
- Greylock Partners focuses on early stage companies in the consumer and enterprise software space and was an early investor in Airbnb and Meta.
- Lightspeed Venture Partners We support early and growth-stage startups in the consumer, enterprise, technology, and cleantech sectors. The company became Snap's first outside investor.
- accel partners We invest in early and growth-stage companies in consumer software, mobile technology, enterprise software, and the Internet. Axel was an early investor in Meta, CrowdStrike Holdings (NASDAQ:CRWD), and Animoca Brands.
- intel capitalis the corporate venture capital arm of Intel (NASDAQ:INTC), primarily focused on technology companies in AI, 5G and communications, software security, IoT, and robotics.
Participate in technology startup IPO
IPOs offer investors an opportunity to get into technology startups that begin trading on the public market.
“IPOs are typically discounted to secure sales, making them even more attractive, especially if the primary issue attracts a large number of buyers,” Investopedia explains.
Until recently, many technology companies chose to remain private for longer periods by delaying or forgoing IPOs altogether. But technology companies have been keen on IPOs in recent years.
According to research from Baker McKenzie, 2020 and 2021 were record years for global IPO raisings. The financial and technology industries are at the top of the list in terms of both amount raised and funding raised. The three biggest IPOs of 2020 include Airbnb with $3.49 billion, DoorDash with $3.37 billion, and Snowflake with $3.9 billion. The winning technology IPOs in 2021 were centered on electric vehicles, ride-hailing apps, and fintech, with Rivian (NASDAQ: RIVN) at $11.9 billion, Grab (NASDAQ: GRAB) at $4.5 billion, and NuBank (NYSE: NU) at $4.5 billion. included.
The technology IPO landscape disappeared from the map in 2022, but there are signs of a comeback in the fourth quarter of 2023, CNBC reported. In late August, grocery delivery startup Instacart, data and marketing automation company Klaviyo, and chip designer Arm filed to go public.
“Other teams will be watching these acceptances closely, and some executives are going to stop waiting around and just get on with it,” said Lise Bayer, founder of IPO consultancy Class V Group. It may be the case,” he said.
Click here for more information on how to participate in the IPO.
Tech Startup Exchange Traded Fund (ETF)
Exchange-traded funds (ETFs) offer a low-cost, low-risk route to investing in high-tech startups.
Investors interested in small-cap tech companies have the Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT). PSCT tracks a broad index of small-cap growth companies in the Infotech space, with an emphasis on the Software, Internet, Electronics, Semiconductors, Telecommunications, and Hardware sectors.
PCST's top holdings include more established technology companies, while the Renaissance IPO ETF (ARCA:IPO) focuses on newly public companies. The top five IPO holdings are Airbnb, Snowflake, DoorDash, and Palantir Technologies (NYSE:PLTR).
Another ETF that tracks recent IPO performance is the First Trust U.S. Equity Opportunities ETF (ARCA:FPX). FPX has a healthy mix of mature companies, which helps diversify its risk profile. The company's portfolio includes Uber Technologies (NYSE:UBER), ON Semiconductor (NASDAQ:ON), and Airbnb.
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This is an updated version of an article first published by Investing News Network in 2016.
Securities Disclosure: I, Melissa Pistilli, have no direct investment interest in any companies mentioned in this article.
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