In Search of Unicorns

In search of unicorns

Luke Johnson, the founder of Pizza Express, serial entrepreneur and angel investor, recently wrote in The Sunday Times how excited he is about the tech startup scene. There is little doubt that tech startups are the most likely to produce tomorrow’s billion dollar companies, otherwise known as unicorns. However, investing in tech requires a degree of prudence as the risk is higher than most other asset classes. Here are a few ways to approach the challenges of finding a unicorn;

Diversify the risk

Tech investment in a single startup is definitely more risky than investing in any other sector. However, the successes can also yield far greater returns. Therefore, it is important to spread the risk over as many startup investments as possible. The recommendation is that you only put 10% of your free capital into this asset class and then spread this investment across at least 10 startups over your investment lifetime. Finally, it is important to reserve 50% of your investment capital for follow-on investment in the successful startups in your portfolio. Otherwise, you will be diluted.

Invest with a lead

Tech investment is a team sport and until you gain experience it is a good idea to invest alongside more experienced angels. They can help set the term sheet and carry out due diligence. Once you have learned the ropes you can take the lead in a sector that you understand.

Tap into strong deal flow

Tech investment is a numbers game. As your objective is to build a strong portfolio it is important to see as many startups as possible. Startup deal flow comes out of incubators and accelerators, angel networks and platforms like our own. Word of mouth can be very powerful. It is therefore useful to socialise with other angels who will often ask you to join a funding round.

Use the right selection criteria

Tech startups are notoriously difficult to judge. The idea is important but not as important as the ability to execute. This means that qualitative measures such as founder strength are crucial. Look closely at Founder/Market fit. This is just a way of saying that a strong founder in an attractive market will normally win through.

Take into account the tax breaks

Most tech investments will be eligible for the highly attractive SEIS/EIS tax breaks. If these are taken into account the annual IRR can be higher than nearly every offer asset class.

Get the right training

There isn’t much formal training available for traditional investors to learn how to invest in tech. However, Dreamstake are offering free workshops alongside the UKBAA to make the sector more accessible to a wider audience.

Investing in Tech can be highly exhilarating. It’s great to be involved with businesses that truly change the world we live in. As well as being great fun, the potential rewards can be off the scale and therefore form an attractive part to a diversified portfolio, alongside more traditional low risk assets.

Article by Paul Dowling –Co-Founder of Dreamstake the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed.

By UKBAA 20 Jul 2015