Whether you’re a seasoned angel investor or a newbie, investing in science and tech companies can be challenging. Many times these types of opportunities are hard to source and understand.
Let’s start with the basics – some simple dos and don’ts.
Do’s of Investing in Science and Tech Companies
1. Be cautious of new science and tech innovations
Angel investing is not for the faint of heart. It is risky. Often, it is extremely illiquid, even less liquid than real estate. You are placing your money in the hands of a very early and unproven venture. And when it comes to investing in science and tech companies, the timelines are long, and if there are returns to be had, they will be further down the line. If you think that any of these things would keep you up at night, angel investing is not for you.
2. Research emerging tech companies
Make sure you have a grasp of the technology, the management team, and the market. In your initial evaluation, you should assess the following:
- The management team: Make sure you are familiar with the people running those companies. What are their backgrounds? Listen to any talks they have given on YouTube. Check them out on LinkedIn. Check their management track record. Communicate directly with them. Talk to others who may know them. The best ideas only see the light of day when they are shepherded by a strong leadership team.
- Is there a market for the product: Is this something that people would spend money on? How big is that market? A vast market is not required, but it should be reasonably sized – close to a billion dollars at minimum for a high risk.
- Competition: What does the playing field look like? You want the field to be heavily tilted in your favor. Lesser competition is better.
- What does the company have that the competition does not have: IP? Trade secrets? Exclusive agreements? These are all barriers to entry. Higher entry barriers are better.
- Company exit strategy: Does the company have a reasonable plan for an exit? At the seed stage, “we’ll be going public” is not a reasonable plan for an exit.
If you understand these basics, then you are ready to dive deeper and conduct a full evaluation of the company, including financials, management, and understanding the intellectual property, which we’ll cover in-depth in part 3 of this series.
3. Reach out to scientists and tech gurus
No, seriously. Ask questions. Ask so many questions. Ask questions until you feel like a four-year-old whose favorite phrase is “why?” Then ask some more questions. When it comes down to it, the better informed you are about a company, the better your chances of being successful at investing in science and tech companies.
4. Understand the terms of the deal of tech startups
It is important that you understand the terms of the deal. On Propel(x), the most common type of funding instrument is a convertible note. The second common form of funding is what is known as equity funding, where the company sells shares of stock (common or preferred). This type of funding is often raised after the initial seed round. In most cases, the original investors’ convertible notes will mature to preferred stock. Preferred stock often has rights that the general common stock does not (such as liquidity preferences). SAFE Notes are a popular instrument as well, and it is important to understand the key differences between a SAFE and a Convertible Note. We will be providing more in-depth details on assessing deal terms in Part 4 of this series.
5. Note how investing in science and tech companies match your personal and business goals
Do you want to make the world a better place? Do you have a particular interest in finding early detection of specific diseases? Decide which type of companies you want to associate yourself with, and then go after the companies that match those ideals. To enable you to start investing in science and tech companies, you will also need to decide if you want to have more than a passive involvement in the company. Are there ways for you to work with and participate in the startup’s journey? If not, you may want to consider investing elsewhere.
Don’ts of Investing in Science and Tech Companies
1. Don’t fall in love with new tech startups
While it is natural to be excited about any investment you make, it should not color your understanding of the company’s strengths, weaknesses, and market risks.
2. Don’t copy other people’s strategies of investing in science and tech companies
As an investor, you want to develop an independent point of view. Assessing the technology, speaking with the leaders, evaluating the marketing strategies – all of these are skills you need to have firmly secured in your back pocket before angel investing. Basically, make sure you’re confident in your own ability to evaluate before you start investing in science and tech companies. That way you won’t be tempted to follow your roommate from college who assures you that personalized laser guns are the next big thing.
3. Don’t expect a quick payout after investing in science and tech startups
In the digital age, playing the waiting game is akin to a lost art. When you are investing in science and tech companies, you are truly investing in the future, and the timelines for these companies are longer than the usual messaging or food delivery apps. But patience is a virtue for a reason; especially when investing in companies that have the potential to have a global impact.
4. Don’t invest if you’re unsure about the potential of new tech innovations
Our final piece of advice? Trust your instincts. You already know more than you think you do, and following your gut is arguably the best thing you can do when approaching a new investment opportunity. Now you are one step closer to becoming a savvy investor in science and technology startups.
Look out for part 2 of the series where we’ll cover how to discover quality science and technology investment opportunities.
If you feel uncomfortable, especially after doing your research, then don’t move forward.
Private Placements are a high-risk investment. An investment in this offering is speculative and and investor could experience an entire loss of principal. Private investments are highly illiquid and risky, and are not suitable for all investors. There is no guarantee that an investment will be profitable or that there will ever be an exit strategy or an opportunity to liquidate the investment. Investments in early-stage private companies should only be part of your overall investment portfolio.
Updated July 21, 2022.