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The Rise Of Startup Investing

By: Jamie Clarke

Looking through circuit boardsIt isn't much of a stretch to suggest that the options for investing in technology startups are approaching limitless. This is thanks in large part to a technology cycle that is seeing the barrier to entry lowering on a continual basis, and more entrepreneurs entering the space as the market's notoriety grows.

While a large and hyperactive market place does symbolize health, it doesn't necessarily mean that every startup that comes along looking for investment dollars is going to be a home run, in fact, just the opposite. With an environment that currently fosters a low barrier to entry, investors have had to become more reliant on, and more disciplined in, their due diligence when vetting deals. The upside is the risk/reward payoff is often greater than can be achieved through public investments.

Advantage Of The Private Investor

Private individuals who have the capacity and ability to invest in technology startups often have the ability to avoid the pitfalls of a singular investing strategy. The public markets preach diversity and investment brokers preach allocating percentages of your funds to different areas of investment. It's these aspects of investing that give the private investor the advantage. They hold a network of advisors and brokers that provide information and act as resources and, ultimately, remove the ego typically found in Angel Investing.

Angel Investors are typically those that have made their money and fame in the technology space and now have shifted their role from entrepreneur to investor. With this experience, they have a sharp eye for trends and what companies to invest in, but their broad experience is very limited. Most know a lot about investing in technology startups, but only know about a specific area.

Anatomy Of A Technology Startup

The most important thing to understand about investing in a technology startup is that it is different, in almost every way, from a public markets investment. From a pure 'dollars in' perspective, your money is going to be illiquid, and generally will be so for a good period of time.

The end goal of a private investment is to get liquidity on your dollars. That isn't as simple as calling your broker and placing a sell order. In startup investing, you get out when everyone gets out. That means there is an acquisition offer on the table or some form of entrance into the public markets through one of the options available in Canada.

Aside from the manner in which you get your money out, the most glaring difference between public and private is the way reporting takes place. As the startups don't report to a standardized governing body, their communication with shareholders is often minimal and will vary from startup to startup. Often, and especially in early stage startups, the financial numbers will be projections. You will receive assumptions of expenses and revenues based on the best possible scenarios and projections as the companies are often too early stage to be generating consistent and significant revenue, and/or reporting.

The startup investing game isn't one built for the faint of heart. Those with the connections to the right networks, who are business savvy, and have advisors with experience to analyze the opportunity are often those that succeed in finding the best investment. While some private investors take the route of investing as a limited partner in a venture fund, the truly savvy private investor finds the investment and seeks out the equity shares for himself, not the fund.

Jamie Clarke is with PODIUM Ventures.

 

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