Some of the most dynamic, exciting startups in the UK over the past few years have been tech firms. Think TransferWise, for instance, which increased in value by over £640m in the space of just 5 years since its inception.
It is therefore little surprise that many investors are asking whether the tech industry is the superior choice when it comes to investing in startups.
It’s difficult to say either way with any certainty. Of course, investing in any type of startup inherently carries more risk than investing in bonds. Yet there are particular advantages to tech startups which make investing in them an attractive option.
Here are some of the benefits to consider when looking at investing in UK tech startups:
Very few companies have the potential to scale up as quickly as tech startups. This, of course, presents a great opportunity for you to generate a higher investment profit.
Think of large tech brands like Skype, Google and Facebook. The latter, for instance, started out in 2004 as a project by Mark Zuckerberg in his Harvard dorm room. In February 2002, it made its public offering with the company value standing at $104b. That’s a huge change in just 8 years!
Tech companies are uniquely positioned in that they do not usually incur increasing, incremental costs for producing their product as distribution grows. An initial investment may well be required to first create the software, but from there it can be produced on a wide scale without needing to significantly change the source code.
Certain industries are notorious for having low-profit margins, with the aviation industry arguably the worst performer. The tech industry, however, stands at the other end of the spectrum.
Companies in an industry can justifiably assert that the industry is high margin if average profit margins exceed 10%. Financial services businesses, for instance, typically have low running and production costs, so profit margins between 15-20% are fairly common.
The tech industry can easily boast of profit margins up to and exceeding 20%. Indeed, it is not unheard of for tech companies to boast a 60-90% margin on their sold services.
#3 Investment size
Tech companies, quite often, do not need high levels of funding to get off the ground. They do not need to purchase a large inventory at the outset, for instance.
This also means that lots of UK tech startups are eligible for SEIS status, which requires the business’s assets to be valued under £200,000.
SEIS is a little-known, powerful investment scheme which offers investors significant tax relief and reduced investment risk. For instance, you could invest up to £100,000 in companies like these per tax year, and receive up to 50% relief on your income tax.
#4 Portfolio diversification
Experienced, sophisticated investors appreciate how important it is to diversify your investments. Across industries, across different size companies, across companies in different stages of the business lifecycle, and so on.
If you are not already investing much in the tech industry, why not add another string to your bow – especially given the high margin potential?
Tech startups that succeed have the potential to literally turn even small investors into millionaires. Take Airbnb as an example. If in 2009 you invested $1000 into the new company, then that would have grown to a $2m return just 8 years later.
The challenge, of course, is determining which tech startups will fail and which will become the next big players, such as Uber and Airbnb.
Part of the solution is to work with an experienced investment company like ourselves. This allows you to better “stress test” different tech startup investment opportunities, therefore increasing your likelihood of getting a high return.
Another important strategy is to spread out your investments. Nobody here said that you need to look at all of the UK’s newest tech companies, and only pick one!
Investing in the stocks of large, existing tech companies can be interesting. However, investing in tech startups presents an exciting opportunity to be a part of something that could actually change the world for the better.
This route offers the chance to not only make a high return. It also gives you the chance to help drive innovation, create new jobs and even improve living conditions for people across the world. For instance, social media undoubtedly has its downsides, but think of how much many of these companies have also empowered many people living under oppressive regimes.
Overview: Investing in Tech
Tech startups encompass a wide range of interesting companies including security, automation, AI, cloud computing, Big Data and more. Indeed, new players within this industry are creating new industries all of the time, such as virtual reality.
There are many advantages to investing in tech, but you should always understand the risks of doing so. Never invest more than you can afford to lose, and think carefully about your risk tolerance. Diversify your investments.
Take your time and survey different investment opportunities in partnership with other investors, such as those within our network here at Bure Valley Group. If you are new to this sphere, it especially helps to rub shoulders with those who have a good grasp of the ins and outs.
Pay careful attention to the idea of the tech startup in question. Review their strategy, and pay careful attention to their team. Investing in any kind of startup is more than just investing in a product or service. It involves investing in those who will develop and deliver it.