Popular investor Warren Buffet said, “Never invest in a business you cannot understand.” Understanding how to invest in tech start-ups can be funny, interesting, saddening, and rewarding for more reasons than this article can contain.
It is for this reason that Warren Buffet despite all his success as an entrepreneur and investor, has kept himself out of the technology sector for the most part.
Knowing and understanding are two completely different things that an intending investor should know.
One thing should be clearer at the end of reading this article and that is how to invest in tech start-ups and make huge profits. There are several ways.
This article helps to distill the knowledge of investing in tech start-ups and helps you brew yours into value multiplying start-ups when you are ready.
- Introduction – The basics
- Who is an angel investor?
- How to find start-ups to invest in
- What is seed funding?
- How to invest in tech startups
- #1 – Play it safe
- #2 – Go all in
- #3 – Start one yourself
- #4 – Invest with crowdfunding platforms
- #5 – Observe the sharks and replicate their moves
Introduction – The basics
The kind of money that swims around successful tech start-ups like Instagram, LinkedIn, and the likes makes many people wonder.
Why they didn’t consider the idea first or even invest in it, if not for anything but the returns?
Those same numbers, in billions, bring tears of joy to the eyes of the creators and investors of these companies.
This is not to talk of the present value of 1 bitcoin, as the bitcoin story is one of regret for many people.
Those who despite opposing it wished they had invested some part of their disposable income into it.
Tech startups come and go, but what stays the same is the outrageousness of the success, methodology, and ease that they bring with them.
From Windows of Bill Gates to iOS of Steve Jobs to PayPal and SpaceX of Elon Musk, there is right now almost an uncountable number of tech start-ups trying to do things for everyone that thinking about it is joyful.
That number is what you are to take advantage of. A man spoke some time ago about how he was there in Paris when Uber was invented, he was the 79th user on Instagram, had the first ride on Tesla, Siri was launched in his house, and he sold apple stocks for $.75.
Imagine having access to all these companies at birth. It’s the stuff of dreams. Investing in tech startups is in cycles and it is something you need to plan for, especially if you are new to it. This is why articles that show you “how to” are written.
Who is an angel investor?
As someone who has read up to this point, I guess it is pretty easy for you at this point to tell that an angel in this context is different from that in biblical settings.
Angels in investing vocabulary, are people, usually high net worth individuals who invest his or her money in an entrepreneurial company.
This is usually done to provide financial backing for the company to survive and succeed and mostly in exchange for ownership equity in the tech startup. Angel investors are sometimes family members, friends, and interested parties.
If you have money, are interested in value multiplication, and do not mind seeing returns on your money for some time, then you should by all means become an angel investor.
How to find start-ups to invest in
Before you go ahead and invest in tech startups, you need to be made to understand and perhaps be comfortable with the knowledge that you may never get your money back.
You may “sink” some money into seemingly profit-projected tech start-ups and not see your money again.
That said, we will get down to searching for these tech start-ups. Tech start-ups are everywhere. Statistics have the number of startups being created every year all over the world at upwards of 100 million.
This means that they are in abundance. The issue is how to find the ones that will fly. You will have to listen up and see things for yourself.
#1 – Direct Pitches
Tech entrepreneurs can pitch their ideas to angel investors. Some tech entrepreneurs attend summits where so many influential figures will be present and then meet them individually after sessions and pitch to them.
Some tech entrepreneurs just hold table discussions and talk about their ideas and it moves from there.
#2 – Summits
There are tech summits like the Momentum where tech and top business minds get to gather and talk about issues.
Summits like that are great meeting grounds for you as an investor or as a tech start-up founder. Innovators, pioneers, and enthusiasts are always present.
#3 – Investor platforms.
Platforms like 1000Angels and some others enable investors to attend exclusive events where they get to connect with start-ups for an annual membership fee.
Rather than giving up a percentage of the upside like you would get in traditional venture funds or syndicates. This platform may increase exposure to start-up fundraising rounds.
#4 – Indirect means
You could occasion on a tech start-up that needs funding and then pick it up from there.
Sometimes, it could just be your friends talking about a new technology that they use that works for them. If you are quick enough, you are sure to make proper use of that information.
#5 – Research
Some people have taken it upon themselves to put out information about tech start-ups to the outside world who may not know what is going on on the inside. Blogs and newsletters that do that can be a great resource.
You can also carry out the research yourself. Start with what you like. Go on Google and ask a question like “what new technology helps me do X?” or “what new app helps me achieve Y?”
Do that and climb up from there. Better slow than out. Grow your knowledge first.
What is seed funding?
Seed funding is collecting money from angel investors. Seed funding is any money that is collected by a company that isn’t through the normal but rigorous process of raising funds.
After seed funding comes Series A, B, and C funding.
How to invest in tech startups
#1 – Play it safe
By the name of this, it is a process where you refuse to fully commit in large amounts to any particular tech startup.
While this may sound like a nice idea, it is a safe one that leaves your profit (should the company grow or decide to exit) diluted. While it means that you get something, it also means that you get smaller than you would have gotten.
To invest like this, if you cannot go about investing manually, there are other noncontact methods of investing.
#2 – Go all in
This one like the name sounds involves fixing some significant amount of money in a tech start-up and negotiating for some equity value for your money. If it works fine, if it doesn’t, fine as well.
While this may sound fantastic as the rewards can be significant earnings or nothing, it calls for due diligence and asking the right questions about where your money is about to go.
In the book Zero to One we’re reminded how Andreessen Horowitz invested $250k in Instagram. Two years later it was bought for $1B by Facebook, returning a 312x return, or $78M on that initial $250k.
#3 – Start one yourself
Another way to invest in tech start-ups that may sound funny is to start one yourself. It is a straightforward way to go about it.
You identify a problem that technology can solve, you bring the idea to a few entrepreneurs like yourself if you choose to.
With a concrete way around the idea, you gather a team that will help you build it and start building away.
The thing about tech start-ups is to remember that you are in it for the long haul and that it will seize a major part of your time. This could also mean teaming up with entrepreneurs who also help bring this idea to fruition.
#4 – Invest with crowdfunding platforms
SeedInvest is a crowdfunding platform that allows individuals to invest in early-stage companies that have been pre-screened for potential viability.
According to SeedInvest, less than 1% of companies that seek funding through the platform are accepted. When you sign up for an account on SeedInvest, you are presented with a list of companies seeking money.
Many companies are open to receiving investments from anyone, but some require large investments and are open only to accredited investors who had an income exceeding $200,000 in each of the past two years.
There are other platforms that enable you to invest the same way.
#5 – Observe the sharks and replicate their moves
Someone said if you want to earn like the big boys, you watch what the big boys do and you do the same.
Since everyone has their reasons for investing, it calls for proper research on your part and if it moves along with your values, then you invest as well.
Warren Buffet who is an investment shark says that as much as you want to follow him wherever he invests, “never invest in a business you cannot understand.”
Before you get started investing in early-stage tech start-ups, it’s important to understand that many tech startups fail and leave investors with nothing. It is a high-risk, high-reward kind of endeavor.
You should also be aware that unlike stocks, you cannot trade your investment in a start-up until they decide to go public. You are expected to hold on to it for as long as possible.