Investing in Technology: Top Tips
When you mention investing in tech, people often relate to the dot.com bubble or the investment successes of high profile social media companies such as Twitter or Facebook. However, ‘tech’ is much more than that. Whether it is medical technologies, manufacturing technology, infrastructure, software, apps or process technologies, we undoubtedly live in a tech-focused world where technology is at the heart of everything we do. That, therefore, also means that everything we invest in has a degree of reliance on technology and innovation.
There is often clamor for tech investments as everyone likes to think they’re ahead of trends and investing in ‘the next big thing.’ However, searching the stock markets is perhaps not the best way for investors to find that tech success.
With specific regard to tech investments, in November 2015 Cambridge Research Associates stated that, “early-stage investments have accounted for the majority of investment gains in every year since 1995, suggesting that, despite the deep pockets of late-stage investors, early-stage investments hold their own on an apples-to-apples basis (total gains).”
This echoes our view. If seeking growth, investing in technology should perhaps be considered at an early stage in the company’s life cycle. This could be at the very early ‘seed’ stage or at the commercialisation stage. This commercialisation stage is our current sweet spot for a number of reasons.
Firstly, at this stage we would expect companies to be post-revenue and have commercial sales. This provides a ‘proof of market’ and shows that there is commercial viability for the technology. So much ‘tech’ is invented every day that establishing what actually will sell is important. Some technologies sound like a fantastic idea in principal but actually have limited commercial value. This stage of company development will usually also show the credentials, skills and desire of the management team. By investing at the revenue-producing stage an investor can really understand the workings of the team, identify any skills gaps and make reasonable provisions for growth plans.
Secondly, investment at this stage allows for suitable growth through further potential funding rounds. An experienced investment manager will be able to outline the funding stages for a tech company dependent on the sector in which they operate. This then allows the manager to have a reasonable perception of what a future exit might look like. This could be important to help the Company understand on which Market to conduct a listing or to understand which market players may be interested in a trade acquisition.
If investors want to support and/or take advantage of the latest tech trends, consideration could be given for portfolio propositions in unquoted stocks. By the time a tech company reaches full listing, they have often exceeded valuation expectations due to hype or trend. As someone recently described it to me, ‘the technology sector is more prone to bubbles that any other.’ Of course there are blue-chip tech investments which may well perform well for investors but these are often in the minority and anyone willing to take a risk in smaller companies may well find a portfolio of unquoted tech companies to be appealing. This is turn may lead them to an EIS or VCT portfolio and may lead to potential tax reliefs as an added bonus.
Ian Warwick is Managing Partner at Deepbridge Capital LLP