Can you imagine life before it was possible to have groceries and toiletries delivered within a day in neatly packed shopping backs, or ride-sharing apps? You probably wouldn’t want to go back to the days before such services became available, and most people would say the same thing too. Innovative startups have, over and over, helped advanced modern life in the ways that business is done. Once a new technology is adopted by the market, it transforms society like a wildfire. The result? New norms, new opportunities and new wealth is formed. This is why technology, particularly early-state tech, is important and GSR Ventures is here to educate us on its importance.
According to research from the Kauffman Foundation, startup businesses—including majority of the tech market—make up nearly all net new job creation in the U.S. and 20% of gross job creation, resulting to an average of 1.5 million jobs every year. Consumer tech alone also both directly and indirectly supports 18.2 million jobs, around $1.3 trillion in annual wages and makes up around 12% of GDP, adding $2.3 trillion to the U.S. economy every year.
With this alone, we can understand why technology, especially early-state technology, matters more than ever.
But the relationship between investors and the tech sector is not the same as it was recently compared to 20 years ago.
Take Amazon, for instance. The company went public in 1997 and was priced at just $18 per share. Let’s say you invested $1,000 in its IPO; your investment would be worth around $634,000 today.
Now let’s take Uber, the world’s largest ride-sharing provider. The company hit the market in May 2019 at a price of $45, closing down 7.6% on its first day. It has fallen much lower since then—trading just over $30 on November 2019.
What does this information tell us? It simply means that investing in companies after their IPO debut isn’t what it used to be. Companies now wait longer to go public and prefer to enter the market as more mature, established companies. The potential upside for public tech investors just isn’t there anymore the way it used to be.
Investing in Early-stage Tech
However, smart investors are finally understanding things. Now more than ever, money is being raised to fund early-stage tech companies, instead of just waiting on the public market after that opportunity is lost.
According to GSR Ventures, there are a couple of reasons why exposure to early-stage tech companies is necessary nowadays:
1. Companies wait longer to go public
Unlike their 1990s and early 2000s predecessors, many tech companies nowadays are waiting to conduct an IPO, counting on the fact that staying private gives them more flexibility and autonomy ad that they can delay going public while investor money is available.
Once these tech companies do finally hit the market, they are more like enterprise offerings rather than true, high-flying IPOs. Think of it like Microsoft vs. a startup like Facebook in its early days. There’s just more potential advantage for investors in early-stage companies.
2. Money can be made well before IPO
Early-stage tech companies use a model that works, but they still have to get that model to scale. Early-stage tech companies usually have already launched their product and focus more on attracting customers and generating cash flow. This what makes early-stage investment different and a lot safer compared to seed investing, which usually helps startups develop their product or service.
3. They’re Focused on Expanding their Markets
A lot of private companies want to have a market secured before their IPO, which means they are busy and focused on growing. The most successful technologies and those that are most likely to create a new norm have the right “product or market fit”.
A product/market fit is described as that moment when a startup eventually finds an all-inclusive set of customers that can relate or connect to its product. Simply speaking, for a product to be successful, it needs to have a market that is ready for it. The product must be able to find that market before it goes public. Think about how many people used Uber before it went public.
4. They Diversify a Portfolio
As per GSR Ventures, early-stage companies only have very few correlations with the broader market, and so investments in them aren’t affected by the same market fluctuations the way publicly traded securities are.
5. Lower Capital Requirements
Pre-IPO companies used to be only available to venture capitalists and major brokerage companies. However, this is no longer the case thanks to mutual funds and new investment models. This has enabled investors who were once excluded from pre-IPO private companies to invest in private companies on a high growth direction.
6. Early Disruption
Technology companies are generally disruptive. Their existence is based solely on solving problems in innovative ways. And, to the inexperienced investor seeking to invest before an IPO, every up-and-coming tech company with good elevator pitch can seem like the next big thing. Instead of using a limited approach, a broad exposure to the full innovation landscape is necessary to pinpoint which ones are most likely to create new norms.
7. Yields the Greatest Returns
In summary, if you want to see huge returns, don’t wait until a tech company hits the public market. Let’s go back to Uber’s story: in 2010, Mike Walsh (a newbie investor), invested $10,000 in UberCab, which we now know as Uber. Walsh’s investment is now worth millions of dollars—and this was only his second investment ever. What does this tell us? Well the stage at which investors get into a company with just a small investment and exponentially multiply it has shifted from post-IPO to pre-IPO.
Early-stage Technology and Risk Factors
It’s important to remember that with the potential for great rewards also comes with great risks (well sometimes?). Investing in early-stage technology comes with an additional risk in comparison to investing in public assets like stocks and bonds.
Successful investing means buying low and selling high. As companies go public with sky-high valuations that they struggle to live up to, it’s not as easy to make the money that was possible say 20-30 years ago. If you’re an investor that wants to see big returns, then early-stage tech companies are where it’s at.