Investing in Technology Start-Ups

| 31 Jul 2012 | 1 Comment

Investing in technology start-ups is currently a highly sought-after form of investment. Taking into consideration the current boom in sales of mobile computing devices, such as tablets and smartphones, along with the global use of applications and social networks, investing in technology products and services is steadily becoming a new safe haven.

investing in technologyInvestment strategists argue that during a turbulent financial climate, investors are attracted to sectors that offer a high opportunity for growth. At present, investing in new technology start-ups is regarded as a defensive move that enables investors to cope with the low-growth and high uncertainty of the current economic environment. This is mainly because technology products and services attract a worldwide audience, thus eliminating their exposure of risk from a single country’s economic conditions.

How can investors profit from technology start-ups?

Technology investors are advised to invest in the early stages of a technology product that has the capacity to generate a significant economic return. There are two primary ways to fund a promising project, namely; angel investing and venture capital. These are forms of providing financial capital during the initial stages of a pioneer start-up company with a high potential for development. Essentially, investors provide seed funding for the start-up with the aim of gaining a return on investment (ROI) through an initial public offering (IPO) or trade sale of the company.

An initial public offering takes place when a company lists its shares on a stock exchange for the first time. The money invested by the public to purchase the company’s shares is distributed to the company and to any private investors.

IPOs are one of the most effective ways for initial-stage investors to convert their investments into cash, by selling all or part of their shares. Moreover, IPOs are highly profitable, because companies initially place the price of their shares at a low bracket in order to encourage individuals to buy them. As the demand increases and consequently the price of the shares begin to rise, investors have the opportunity to generate significant profit very quickly.

There are a number of examples of start-up IPOs that have made a fortune early on by offering their stocks to investors and listing them on the stock exchange:

Facebook: The world’s largest social network placed its shares at $38 on its initial public offering in May 2012; this indicates an outstanding investor interest in the company. By selling stock at this value, Facebook generated $16bn and it is now valued at $104bn, which is the largest-ever valuation by a technology company at the time of its initial public offering.

Zynga: Another company, which demonstrates a profitable IPO, is Zynga. In 2011 the company was listed on NASDAQ and raised $1bn on its initial public offering for its investors: Digital Sky Technologies, who invested $180m into the company, and Google and Softbank who invested another $300m.

LinkedIn: LinkedIn was one of the first major social media IPOs to go public (May 2011). It priced its IPO at $45 per share, later raising the price $83. As the first trade day came to a close, LinkedIn’s value had risen to a staggering $8.3 billion.

Trade sale of the company

investorsWhen start-up companies are acquired by larger organizations, early investors can generate a large ROI. This is well demonstrated in the case of Yammer, which was acquired by Microsoft for $1.2bn. The funding for the start-up was raised with a $142m investment, received by four venture capital firms and the angel investor Ron Conway, who also invested in Google, PayPal and Twitter. The acquisition by Microsoft in 2012 made the start-up’s initial investors significantly wealthier.

Two other major acquisitions undergone recently are that of Face.com and Instagram.  The initial funding for the Israeli start-up, Face.com was estimated at $1m and $4.3m in 2010. Reports indicate that Facebook bought the facial recognition service in June 2012 for between $80 and $100m, yielding large profits for the company’s investors. In addition, Facebook’s acquisition of the photo app, Instagram, which was reportedly acquired for an astounding $1bn, is one of the largest company acquisition deals ever announced.

Investment opportunities

There are plenty of highly promising technology opportunities for individuals and companies to consider investing in. Below are some of the most highly valued Silicon Valley start-ups that currently attract the attention of high-net-worth investors:

Pinterest is a content sharing website that recently received $100m in a financing round. The funding was headed by Rakuten Inc., a Japanese e-commerce website, along with Pinterest’s initial venture-capital investors. This investment now values Pinterest at $1.5bn. Last year, it was valued at $200m. In March 2012, Pinterest was reported to be the third largest social network in the US, with the fastest growing number of users in the world.

Dropbox is a file hosting service offering file synchronization and cloud storage. Dropbox’s initial funding was rated at $257.2m. In 2011, Dropbox generated $240m in revenue and is now valued at $4 billion. Two of the famous private investors of the company are Bono and The Edge (U2).

Kickstarter is a crowd funding website. It provides an advanced platform for individuals to fund a broad range of creative projects. Kickstarter received $10m in funding from the venture-capitalist Union Square Ventures and three angel investors. Kickstarter’s current estimated worth is $28,116,552.

Successful investment tactics

The latest trend in investment strategies is the “spray and pray” tactic. This technique is widely used by big-time tech investors, such as Ron Conway, as it is considered highly effective. Spray and pray involves making early, small investments in various start-ups and then proceeding with additional investments only with the companies that perform well. It is regarded as a relatively safe practice, as investors only need a part of their portfolio to perform well in order to earn money.

Determining the right start-up opportunities to include in your portfolio can be complicated. Investors need to be continuously up-to-date with the latest technology news, while remaining on the lookout for the best developments in the market.

After spotting the right project, investors much conduct a thorough analysis in terms of the demand for the technology, the competition, as well as the ability for the project to develop and adapt to future market changes. It is imperative for investors to gain a clear understanding of the rationale behind the operation of a start-up, as this will determine its performance.

As Reid Hoffman –angel investor in LinkedIn, Facebook, Zynga and Flickr – argues, there are three issues to discuss with the managers of the start-up:

  • How do they plan to reach a worldwide audience?
  • What is the unique value proposition of their project?
  • Can the project secure additional funding in later stages of development?

Technology start-ups: A safe investment

In periods of economic instability, individuals search for safe ways to invest their money. Technology products and services are an investment area growing in popularity, as it has demonstrated a proven track record. Individuals and companies who fund innovative start-ups in the early stages of development, have the ability to make huge returns on their investment, mainly though an IPO or trade sale of the start-up.

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  1. Dean Paonessa says:

    Its such as you learn my thoughts! You seem to grasp a lot about this, like you wrote the e-book in it or something. I feel that you just could do with some percent to drive the message house a little bit, but other than that, this is excellent blog. An excellent read. I will certainly be back.

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