A good diversification strategy is critical to successful investing. There's a notable exception and that's technology. Whether tech-based or tech-enabled, how companies use tech may be diverse, but that they use it is a constant in the best performers. In this episode, Dave walks us through why Seedfunders is so focused on tech enabled companies and why you should be too.
Hey Joe. How are you doing?
Living the dream. Thus far, we have talked in depth about a diversified portfolio and how important that is. I wanted to dig a little more on that today, and specifically look at diversification. Diversification in technology. What exactly is technology diversification?
Joe, let’s start with the summary of what we’ve already discussed. We’ve talked about different types of investments and asset classes. Traditional asset classes, we talk about stocks, bonds and offer real estate in there. Those are traditional. People understand you invest in stocks, bonds, real estate, but then there’s what we call alternative investments. This is where a startup is an asset class. It’s an asset class within alternative investments. Basically, the recommendations are to investment about three to 5% and no more in alternative assets, because they are risky. Particularly, startups is one of the riskiest. So, three to 5% in an alternative asset class which is startup investing. Technology startups are part of that alternative asset class.
What exactly is a technology startup?
There are two parts to that. Of course, technology and startup. Let’s talk about the startup part first. Previously, I said I consider a startup, a company in a certain phase of when they’re raising capital. Certainly, a friends and family round or pre-seed round or seed round. Could be multiple seed rounds. Then you’d get into what’s called a series A and series B. We talked about all these things. I would start with talking about a Wikipedia definition of a startup. A startup company or a startup is a business in the form of a company partnership or a temporary organization designed to search for a repeatable and scalable business model. That’s important, a repeatable and scalable business model, because when you look at those classes of investment or those levels of investment, when you get to a series A certainly, you’re looking before series A. You’re looking for a repeatable and scalable business model in the seed or pre-seed stage.
Then you get to a series A. By then, you’re getting pretty close to what that scalable and repeatable business model is. when you get to a series B. Typically, a series B is going to be capital for growth. You’ve already attained that repeatable and scalable business model, somewhere around the series A mark. I would say a startup is a company that’s raising capital up to and probably through a series A. But once they start raising capital into series B, they’ve really got that repeatable and scalable model down. And now it’s time to scale.
Got it. So, that’s the startup part. How about the technology part?
That’s where there’s a lot of confusion. Take for example, this definition from funders club. A tech startup is a company whose purpose is to bring technology products or services to market. These companies deliver new technology products or services, or deliver existing technology products or services in new ways. I find that quite limiting. It leaves out what’s called tech enabled startups – tech enabled companies. They might deliver a routine product or service, but using technology to do that. Any definition that says a technology startup delivers that technology product is really not right. I would consider those types of startups as tech startups as well, even if they’re a technology enabled company.
Can you enable our understanding with a couple of examples?
Sure, how much time do we have? Let’s start with the biggest, well-known example. I think is Uber. Taxis have been around for years. They pick you up somewhere. They drop you off somewhere. That’s the service that Uber is delivering. They pick you up and deliver you. Uber does the same thing, but they developed technology to change the way that happens. They haven’t developed a new way to take you from point A to point B. They developed technology to make it simpler and easier. They’re really using new technology to deliver an old product. That’s what a tech-enabled company is.
A tech startup is not just a company that develops new technology or delivers new technology. It can also be what’s called a tech enabled company. Any definition of – just a technology is too narrow. It leaves out a significant number of potential investments that people might not consider to be technology investments, but really, they are. It’s ironic, because those tech enabled companies, they’re a lot easier to understand to the lay person than really high-tech investments. Yeah, it’s a taxi. It’s a different way for a taxi. It’s an Airbnb. It’s a different way to stay somewhere.
They understand the product, because it’s an old product, but it’s delivered with new technology. So, they’re actually easier to understand for the non-technical person.
I think I understand, with that example. Do you have any other examples to round out our knowledge?
Sure, let’s look here in Tampa Bay. Florida Funders invested in a company called HOMEE. HOMEE is a system where contractors come to your house, and fix something. That contractor has been coming to houses for years to fix stuff, but they made it an Uber-type of an application. Basically, the product is still a plumber or an electrician coming to your house, but it’s not tech enabled. Basically, the technology allows these people to come immediately. Within an hour or two or whenever you want them. Versus calling, and doing it the old-fashioned way. Again, it’s a tech enabled company, but they’re delivering the same thing. In fact, if you look at HOMEE’s homepage, they call themselves a software company, but they’re using technology to deliver an old service.
Also, another one that Florida Funders invested in, Trash Butler. The company comes and picks up trash at your door, at apartment complexes. But they basically have a secret technology to make it really simple, really easy. The software makes it all possible efficiently and cost effective. Again, it’s a tech enabled company, but they’re picking up trash at your door. Again, tech enabled companies are certainly technology companies.
Earlier, you said that three to 5% of our portfolio would be a good target for startups. As we understand tech startups, how much of that three to 5% should go towards those tech startups?
In my opinion, all of it. Tech startups give the investor the highest potential return. Since, they’re typically what’s called scalable. For example, take a software platform, take QuickBooks. QuickBooks develops a software system. It can be developed once and then sold over and over. Each sale creates revenue, even though the basic product doesn’t have to be rebuilt every time or re-invented every time. It’s constantly upgraded. Actually, the base product is there, and they could sell it over and over. Similarly, tech enabled companies take Uber. They developed the software. Then they could deploy it over and over, all over the world once the software is developed. So that scalability is what creates the growth opportunities. These growth opportunities are well in excess of non-tech investments like a carwash or hourly consulting work or things that aren’t that scalable. The technology makes things scalable. That’s why the returns are much higher.
So, when you say all of it, then you must really believe the returns are better. Do you have any stats on the returns for tech investments versus non-tech?
Joe, I always have stats. But rather than a list of studies and analyses. I’m going to cite just one source. CB Insights published an article just last month. It’s entitled, From Alibaba to Zynga: 45 of the Best VC Bets of all time and what we can learn from them. The first thing we learn is guess what, they’re all tech or tech enabled companies. Forty-five of the best VC bets are all tech or tech enabled companies. They include: WhatsApp, Groupon, Snap, Google, Twitter, Facebook, Lending Club, Dropbox, Spotify, Uber, Airbnb, Zoom. These are all tech or tech-enabled companies. The 45 best VC bets of all time. I rest my case. The tech startups are where people should invest.
It all sounds great, but the big problem is, there’s not a place anywhere to invest in tech startups. What are we going to do about that?
You know my answer to that. You have to join a group. It’s the only way to see enough deal flow, and enough due-diligence done to make enough investment decision and diversify to get the one or two big hits that you’re going to get in the technology areas. There are a lot of ways to do that. As we discussed before, investors can choose national crowdfunding networks. There is SeedInvest, StartEngine, AngelList, WeFunder or you can join a local organization like some of those in Florida; FloridaFunders, NewWorld Angels, Miami Angels, Bridge Angels and we’re of course SeedFunders.
So, those investors who join SeedFunders then they pretty much get to fund the next Facebook.
It’s funny you say that, because when we’d started out this podcast, I made a list of topics that we would talk about. I wrote those down for a future podcast. One of those is called; Finding the next Facebook in Florida. That is a topic for a future podcast.
Can’t wait, any closing thoughts.
I’ve always been a big a fan of Yogi Berra quotes. I was recently reading a lot of them on the internet. It’s amazing how many apply to startup investing, almost every one of them. I think I’m going to use a few of those in these podcasts when they’re applicable to what we’re talking about. today’s quote is, “The future isn’t what it used to be.” As it is with startup investing and technology. Technology is the future, and investing in it now can yield significant future returns which isn’t what they used to be.