Here's How Investors Can Break Into The Tech Sector Access to hot tech deals is typically what differentiates top investors from the rest.
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The challenges for everyday investors to break into the tech sector are complex. Access to hot tech deals is typically what differentiates top investors from the rest.
Like many industries, technology can often be a private club with entry only allowed to the insiders. The top companies that everyone wants to be in have many options from whom they take capital, and they can thus be very selective. Just having the ability to write an expensive check will not get you through the door.
If you look at the companies that my company, Andra Capital, has invested in, we are funding names like Palantir, SoFi, Tanium, Carta, Snyk, and many others. They have a who's who of investors, from Bill Gates and Marc Benioff, to Accel, Tiger, Alphabet, Fidelity, and Temasek. To be able to get into the right companies alongside investors like these takes several things.
To start, one must have the relationships, network, and reputation within the founder community itself. When our team looks at a company, we often know the management from having worked with them in the past, in addition to overlapping networks and business experience that assist our connections. These relationships get us through the door, and they allow us to learn about the business and its team well before actual financing events.
Having a team with a network and physical presence in Silicon Valley is still essential, even in the current societal age of Zoom meetings. Over 70% of global tech unicorns are still coming out of Silicon Valley, and founders and investors are most comfortable doing business within this 20-minute radius.
While access is key, the question many ask is how global investors can best participate alongside the big players. There are several ways, but I would strongly urge caution on many of these due to the high level of risk and difficulty for investors to do their due diligence. I'd like to draw your attention to a few here:
1. ANGEL INVESTING This involves providing early-stage funding to startups that are typically pre-revenue or just going to market. This will require slowly building a network within the startup ecosystem, and attending pitch events to identify promising opportunities.
2. VENTURE CAPITAL This is the most popular and practical approach: partnering with professionals with a track record. The typical venture capitalists focus on early-stage and growth-stage companies, Series A and B-plus, which historically have been very risky, with that billion-dollar-plus win needed for the portfolio to make returns.
Most funds, especially the well-known brands, do multi-stage growth, investing all the way from US$100 million to $100 billion, but this approach has some issues. First is the large minimum check size of $30 million-plus. Second is the long lock-up periods- 10 years-plus to get your money back. Last is fund size. The big brand funds have ballooned in size from $300 million or $500 million just a few years ago, to $4 billion, $8 billion, or even more. This often results in these funds having hundreds of good and bad investments, and everything in between, chasing deals and valuations. Now, we are seeing the negative results of that strategy, as many of them are down from 40% to as much as 80%.
A good fund must have a focused and differentiated investment thesis, and be the right size to be selective in the deals they choose. After many years in the industry, both as a founder and investor, I created Andra to help conservative global investors access this asset class more easily and transparently, and to take advantage of the current market in technology.
3. CROWDFUNDING PLATFORMS Some crowdfunding platforms specialize in raising funds for early-stage startups. This can be very interesting and exciting, but also full of fraud, with many companies failing to launch their product. It's often very high risk, and features too little corporate governance.
4. SECONDARY TRADING PLATFORMS NASDAQ Private Markets (NPM) is one of the best-known examples of this. These can sometimes have shares with well-known, quality companies. But the issue is that the investor is typically blind as a buyer. They cannot access company financials, management, growth plans, cap tables, etc. Thus, it is very difficult to understand if you are getting an appropriate valuation, especially when it comes to common shares that should trade at a significant discount to preferred, and it can be a riskier investment in case of adverse events like an early acquisition.
Investing in private companies can be very lucrative. But it must be done after thorough due diligence, assessing the company's potential, understanding the market, and seeking professional advice to mitigate risks and increase the chances of a successful investment.