April 26, 2013
This article was originally published in the Global Banking & Finance Review.
With the benefit of just a few years’ hindsight, there aren’t many who would have turned down the opportunity to be in at the ground floor of today’s tech mega brands such as Apple or Microsoft – iconic and internationally renowned businesses with share prices to match. The ground floor of a tech startup is, however, a place which, in the past, very few people have had genuine access to. Historically the world of startup investing has been the all-but exclusive domain of the Venture Capital Fund – a pot of managed money, commonly dislocated from those wealthy individuals it belongs to.
The system, however, is changing and for many of the holdover investors, this change may be one they have trouble keeping up with. The marketplace is opening up and actively welcoming those who didn’t previously fit the model. This new kid on the block is the Business Angel—an individual with the private resources to invest and the desire to be personally involved with his investment and even help manage its activity.
These elite private investors are astute, agile and seeing returns by focusing on three primary things;
If startups are synonymous with one thing, it’s innovation. From inception, a startup’s focus is on providing an exceptional or unique product or service to a group of consumers. This innovation itself acts as the scent of pollen on the air, attracting and motivating progressive investors who will look to buy into future possibilities.
Further to this, a component truly unique to startups and one which can solidify interest for Business Angels, is their ability to form together and create startup communities. These communities can act as proverbial beacons for Corporate Venture Capitalists and commonly, this is where the next round of funding for startups and early stage investors occurs. Startups at this level can also gain the attentions of larger corporations keen to purchase them outright or tap into their innovation in order to help reinvigorate their own aging systems. This situation tends to end in an acquisition, or at the very least, a healthy increase in revenue and publicity.
For publically traded companies, the fundamental questions for investors will always be, “How much revenue is the company generating?” For a while, tech startups were viewed differently, able to indulge in the notion that revenue was not essential to build a company as long as there was enough user endorsement. The Venture communities flocked to this model, funding consumer tech startups which have since struggled to turn positive user sentiment into positive revenue.
For the new breed of Business Angels, who likely have experience in investing across a broad spectrum of markets, the fundamentals of smart business are closer to the surface and commonly more demands will be levied to provide defined revenue streams which will stabilize the fledgling business in the short term and provide more substantial profits in the long.
The Feeder Market
Although speculative, viewing the startup marketplace it as a feeder market for public investments has gained a lot of traction in recent years. While not every investment is guaranteed to succeed – in truth, a significant number will not – for those that do, they generally eye as a goal the potential of making it to the public markets.
By studying the shifts in the evolving technological landscape and weighing them against a startup’s innovation, revenue model and product potential, it is now possible, more than ever before, for savvy private investors to see their investments in startups feed into a lucrative public investing strategy.
And when a startup investment reaches that peak, becoming a publicly traded company,the cycle can then begin again, with funds trickling back down to grow the next wave of innovative startups into the ‘next big thing’.