How Can I Invest In Technology?
Nowadays, investing on tech companies is trending, as the recent examples of IPOs valued at thousands of millions euros achieved after a couple of years by some startups are really appealing and tempting.
There exist several ways of investing if we want to jump-start on the technological investment world:
- Directly as an angel investor.
- Joining an investment club.
- Through an investment fund.
Through novice eyes it may seem that all these means of investment are equal but, in reality, this is not so, as there exist significative differences and possible important aftermaths on the safety and success of the investment, which I have witnessed throughout years of working via these different modalities of investing.
Angel Investor
In the 1980’s, working as an administration and finance executive in a portuguese subsidiary of a french multinational company (Ciments Français) and being Accounting professor at a Porto Business School, I started sporadically investing in some startups with technological background or with an innovating business model. One of my first investments was one small software company which worked on accounting and billing program development for SMEs .
At that period, I discovered investing opportunities through some friend, client or provider and, usually, my decision was rather based on my intuition on the promising future from the young company than in the meticulous due diligence from the business I was going to invest in.The opinion from a more expert friend on the sector and the confidence the management team transmitted were enough for my investment decision making, as in the previous case where I was knowledgeable about accounting software sector. However in other investments on several sectors i was not knowledgeable about, success or failure, in the end, depended more on luck than anything else.
Nevertheless, I didn’t have to give explanations to any third party on my decisions to invest nor about the investment’s success or failure, but, in some cases, i reckon on having blindly invested. Furthermore, as many other investors at that time, I had some success but also some resounding failure which served me as learning experience. I decided to never invest on my own on a business which i didn’t know in depth.
Investment club
In the late 1980’s, I joined an investment club with half a dozen friends, in which each one of us had a portion of capital, equal to the value of a car and from there we started to make more structured investments( and well thought out ) in startups and listed companies.
Investment decisions were made unanimously and the divestmentones through majority. For the listed companies we aimed for undervalued small caps (Value strategy) and we disinvested when their prize was close to the base value, which we calculated by analyzing the available company’s information.
For the startups, we had to reach an unanimous agreement on the investment’s value and entry conditions, and always signed a partnership agreement with the business’ promoters where we already had settled tag-along and put-option for a symbolic values clauses, which was exercised on the case of business’ failure and in order not be involved on the long-lasting process of bankruptcy. If the company progressed well, the exit was done after 5 or 6 years by selling to the entrepreneur for a value calculated by an UEC’s(Union des Experts Contables) equation based on the own funds value plus a goodwill value.
Even Though, the investment decisions were unanimously made, there was a case of an investment we made on an industrial company from the wood furniture sector whose decision was based ,fundamentally, on one of our club’s member which was a reckoned expert of the sector. Our capital investment was fundamental for the obtention of an long term bank loan which was required to do the company’s turnaround. After two years, throughout the production’s technical problem monitoring process and the loss of a big deal with IKEA, the company entered bankruptcy and we lost all the investment. During the bankruptcy process we became knowledgeable about how the member that suggested the investment and the entrepreneur were related by family ties (which he hid to us) and had a direct interest on the operation. This meant a serious conflict of interest which never would have happened if the investment was dealt on a more professional and structured way.
This investing framework was still very open as we only had to justify our decisions between ourselves but, at the same time,was an unprotected way of making investments.
Investment Fund
In the 90’s, I joined the Amorim Group (world leaders on cork products) at a investment vehicle with a 250M€ Capital which, with some leverage, was able to halt equity valued at more than 300M€. This vehicle had the setup of a corporation and was owned by two shareholder groups: Amorim family, which held majority stake, and a syndicate of about 3 institutional investors leaded by the Compagnie Financiere de Suez.
The investment and divestment decisions were made by the Administration council of the fund by simple majority, there being some decisions that required the favorable vote from the institutional shareholder investors in the case of possible interest conflicts (as, for example, acquisitions of assets owned by any of the partners)
With this vehicle we invested on several companies, as development capital, and also in important technological startups as TeleCel, today built into Vodafone Portugal.
This style of investing was way more professional and the decisions had to obey the Corporate Law and the Partners Agreement where the rights of the minority were protected. This closed investment vehicles (usually as familiar open-ended collective investment schemes, also known as SICAVs in Europe) are not opened for investors, as opposed to how are the FCR Funds.
Venture Capital Funds
From 1996 I started my investment activity as a professional on a Venture Capital management company. Initially, in Portugal and from 2004 in Spain.
Being the VC Funds required to be registered on the CNMV ( the Spanish National Securities Market Commission ) they have to follow really strict regulations about Compliance, Reporting and legal obligations that, throughout the years, have experienced an increase as for instance of the compliance with the anti-money laundering norms and the investors qualification between retailers and professionals.
Being autonomous patrimonies without legal entity, the VC funds must have a management company that handles the assets on behalf of the investors, this company is required to be CNVM approved. As any other company, the management company has an executive body which is it Board of Directors which is who has to make all the decisions about the Fund’s patrimony. Normally, the investment and divestment decisions of the Fund are delegated by to an Investment Committee that involves Board members, and eventually, independent investment professionals.
In addition to the Fund members assembly, where all the investor are represented and that is the assembly that approves the Fund’s accounts and, as last resort, has the power to modify the management company of the Fund if a large majority of its members are in discomfort with the management, there is a body in charge of the Fund members board which is the Fund Oversight Committee that is made up of the principal investors and several highly experienced and renown independent professionals in VC.
This committee has, among other duties, the one of resolving eventual conflicts of interest that may arise between investors or between investors and the management company. As possible conflicts that may need to be resolved we can have:
● Some investor in arrears with capital calls
● Deal with an investor’s investee
● Deal with another’s Fund investee being managed by the same management company
● Equity stake or funding at a management company’s member investee
● Any consulting agreement with management company’s member investee
In no way does this mean these previous kinds of deals cannot be made, but to do so these must be clear, transparent, well-known and expressly accepted by the investors through the Oversight Committee.
In conclusion, the investments I make through VC Funds( where at the same type deal with my own and other people’s money ), because of its complexity, the amount of regulations and checks to be met ahead of the investor’s group (framed by the Fund Management Regulation and the VC Law ), the CNMV, the SEPBLAC and the Bank of Spain, they hold greater safety (guaranteed by the duties of compliance and transparency ), than the investments I used to make in the past as an Angel Investor of at my Investment Club, but as at that time, it still is for me an exciting activity that keeps me excited.
Finally, as a recommendation to any investor that is appealed on investing in technology, I would suggest that unless they hold a direct experience on the sector and they are able to invest a great amount of time on the decision and investment follow-up, they should rather do it through a Venture Capital Fund comprised of an experienced investment team and a renowned management company than by themselves or with a friends club.
