Investing in Tech Startups: An Investor's Guide

When looking at the technology startup world, areas that are ripe for investment include fintech, medtech, cyber security, AI and IOT.

Whether you are a seasoned investor with a burgeoning portfolio or are exploring the option of investing in a startup for the first time, equipping yourself with as much information on both the risks and rewards is essential. While investing in early-stage businesses is renowned for being high-risk, when such ventures pay off, they can be hugely lucrative.

Over the past 20 years, the technology community has been a focal market for investment, with fast-growth, disruptive tech startups famed for offering interesting investment opportunities. However, how you invest, the stage in which you invest and the amount in which you invest will be dependent on your risk appetite and your personal financial goals.

When looking at the technology startup world, areas that are ripe for investment include fintech, medtech, cyber security, AI and IOT.  

Types of investors

There are three main types of investors. These are:  

  • Angel investors: An angel investor is an individual that has a high net worth and can offer a startup the financial support they need to scale.
  • A venture capitalist (VC): This is an investor that provides financial backing to firms with high growth potential in exchange for an equity stake. Funds used can be pooled from investment companies, large corporations, and funds.
  • Crowd investor: As with all industries and sectors, technology has encouraged the progression and evolution of how investors can invest in startups. This has seen a rise in the number of equity crowdfunding platforms being launched. In short, these platforms allow investors to make up part of a crowd of investors, investing as much or as little as they wish.  

Why Invest in tech startups?

There are many reasons you may want to invest in a startup technology business. Below are the most common:  

  • Growth potential: Identifying the growth potential of an early-stage business can be difficult. It’s essentially a guessing game. However, by conducting competitor analysis, market research and absorbing all the information outlined in the Business Plan, you’ll be able to gauge the business’ growth potential and what return you can expect on your investment.  
  • Belief in the business: Many tech investors talk about the ‘gut feeling’, deciding to invest in a tech startup that feels right. Whether impressed by the technology itself or the entrepreneur's ability to achieve their growth ambitions, having belief in a business idea is essential before parting with a penny of your money.  
  • Sense of fulfilment: The majority of investors in tech businesses are either established business people or are coming towards the end of their ‘big career years’, many of which are seeking a sense of fulfilment from the business decisions they make. When investing in a startup business, you are essentially giving an entrepreneur the funds they need to make their professional dreams become a reality.  

Tips for investing in startups

Whatever your investment structure or agenda, there are a few tips to consider when investing in any startup business.  

  • Due diligence: Conducting rigorous due diligence on any opportunity before you decide to invest is a wise move. This will ensure you are fully aware of the risks involved, the people you are going into business with as well as market conditions and opportunities.
  • Understand your role: There is no such thing as a standard list of investor responsibilities, with every investor/business owner relationship being unique to that deal. Therefore, if you’re passionate about being a hands-on decision maker or would prefer to be a ‘silent’ partner, ensuring this is agreed upon and written into your deal is advised.  
  • Get an independent valuation: Although you may be completely sold on the business’ ability to use your money to grow and scale, you will need to ensure you are getting the right amount of equity for your financial investment from the offset. For this reason, having an independent business  valuation is a worthwhile task, allowing you to start the investment journey knowing that you have not overpaid for your equity share.  
  • Do you have an exit plan? The majority of investors will invest money into a tech startup in exchange for equity (a share) in the business, gaining a return on their investment via dividends payments. However, it may well be your objective to invest your money for X amount of years before selling your share back to the initial owners. Having your exit strategy laid out before signing on the dotted line is the right thing to do for all parties.  

Looking for startup investment opportunities?

Here at Lime Advisory, our forte is pairing investors with startups and early-stage businesses, ensuring both parties’ finance goals are aligned. If you are seeking to discuss investment opportunities, contact our specialist team right away.  

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