So you want to join the 21st century by investing in technology, but you don’t know where to begin?
The last few decades centred on real estate, and many of us, or our parents, have benefitted from this by buying a first home, maybe even a second one. You or your parents did this by taking advantage of ever-increasing real estate prices and affordable mortgages. But how do we translate this success into investing in technology? Can we employ real estate investment strategies to that of tech? At Altio, we think so. Instead of buying a home, it is time to buy property in technology.
In the past, secular trends have tended to be underestimated, but when investing in technology, secular trends cannot be overlooked anymore. If we didn’t already know it, COVID has solidified the argument that technology and digitisation are here to stay. Now, we need to determine the best way to take advantage of the maturing tech sector.
Investing in technology requires different outlooks and considerations in comparison to real estate investments. First, let’s state the obvious: tech is not immediately tangible like real estate (no, Google merch does not count). If you invest in Apple, you may not immediately be able to hold the newest iPhone, but your investment enables further development so Apple can keep churning out new models every year. If you’re gung-ho about having a stake in the latest and greatest technologies, then tangibility hopefully isn’t a deterrent. Moreover, tech doesn’t have a mortgage, so investing requires a lot more capital to reach the same returns. Lastly, investing in tech implies investing in companies. To do so, a number of subjective assumptions have to be taken into account such as competition and evolving customer behaviour. Investing in companies and their technologies requires marrying expertise in the tech field with financial understandings of business valuation and assessment.
What are the options for everyday investors turning to tech? Altio has a few takeaways regarding the difficulty for everyday investors to actually make money when they invest in tech. In short, for the individual investor: we aren’t very optimistic about the routes of venture capital and EIS, but we back solutions that focus on stock market investment. Let’s expand upon these points.
Unless you are a big pocket investor, you can rule out investing in a venture capital. VC is not particularly accessible for the everyday investor, as it is primarily composed of institutions, tremendously wealthy individuals, or partnerships within these groups. Accordingly, investing in VC can be quite a political process. VC also requires investors to play a significant role in management, so if you’re looking for a hands-off investment process, VC is likely to be fairly demanding. Furthermore, the proliferation of venture capital has diluted the sector. We account for 800 VC managers for 3000 UK tech companies.¹ Overall, VCs have seen fairly poor performance, with decreasing deployed investments and stunted deal activity. Some surveys are showing that up to ⅔ of them have negative returns.² Due to the inherent risks of venture capital investment, there is potential for huge loss when ventures flop. In fact, 70% start-ups go under during the VC funding process.³ So, unless you’re ready to personally lose large chunks of money, VC probably isn’t for you.
If you’re in the UK, you may consider the Enterprise Investment Scheme (EIS), which is a fairly simple and tax efficient way to add a start-up to your investment portfolio. However, EIS is only applicable for small amounts (less than £15m before investment and £16m after) and only for UK-based companies. Furthermore, there is a stipulation that the company cannot be listed on the public market, nor can it have any plans to join one. Beyond restrictions, it is important to note that EIS is highly illiquid and unpredictable. The unfortunate truth of EIS investment is that approximately 95% of businesses die with a full loss on investments.⁴ We also often see a lot of overt publicity for EIS. From our experience and observation, excessive publicity and advertising for a very particular opportunity generally suggests the business or product is not very good. A good product sells itself, and the common usage of publicity does not bode well for the quality of a product with EIS. However, EIS is ideal for backing the idea of a friend.
So if not VC or EIS, what about the good ol’ stock market? It’s tried-and-true, an established and vetted investment option. Stockopedia lists near 200 UK tech stocks, which may seem like a sufficient variety to make profitable investments. While the UK market has interesting tech stocks such as Avast, the truth is that they are not growing very fast. Avast grows only about 2% a year, but it is valued nearly four times its sales. In comparison, China and the US have significantly larger pools of high-performing tech firms, positioning these as the ideal target for investment. Despite what many people think, BigTech is barely more expensive than that of smaller, well-known companies in the UK. Accordingly, having a good basket of BigTech stocks can be ideal given their solid positions, high growth, prospective target market, and achievable valuation.
If you listen to investing gurus, you may have a tainted perspective about tech stocks. Popular business author and motivational speaker, Phil Town, has been outwardly hesitant about investing in technology.⁵ Warren Buffett, too, notoriously avoids the tech sector, though has investments in IBM and Apple. Both Buffet and Town argue against investing in tech because they are “tough to understand,” advocating only for investing in that which one understands well. Not being able to understand technology should not be a deterrent to investing in technology. You don’t need to acutely understand every minute detail of the technologies or their implications in order to invest in tech—that’s what tech experts like the team at Altio are here for.
So you may be thinking, why invest in tech at all? Despite seeming unsustainable, ever-changing, and difficult to understand, the tech sector is actually incredibly stable and reliable. This is where those above-mentioned secular trends come into play. Compared to the rest of the market, some tech companies are trading on low valuation premiums with promising price/earnings-to-growth (PEG) ratios. Moreover, the top five S&P 500 companies are all in the tech sector.⁶ But with the world changing so rapidly and new technologies emerging regularly, how can you stay up to date on new developments and trends in the tech sector? Keeping track of new technologies and their implications in the stock market is a full-time job, and most of us don’t have time. At Altio, we think that investing in tech should be the easiest, most efficient decision you’ve ever made. As a team of tech enthusiasts and finance experts, Altio performs routine analysis with a globally diversified portfolio, putting the hard work in to understand the tech sector, so you don’t have to.
Stay tuned for more information about the launch of our income product with an 8% yield per year.