Technology Companies Are Not All the Same
“Tech” has become the dominant term in many fields of endeavor. In the business world, it refers to the application of technological know-how to some commercial activity. Sometimes, the term is used synonymously with “technology”. Technological change, which occurs continuously, is the cardinal feature of the phenomenon of “tech”. It is the tendency to build on the basic principles of technological know-how and to derive useful new applications from the existing ones.
Venture capitalists look for venture capital in the same way they look for angel investors. A venture capital firm will finance a start-up company for the purposes of providing a competitive launch platform, guidance, products, and/or services that have been developed from the “tech company” or through its subsidiary(s). There are two types of venture capital firms: those which exclusively finance start-ups and those which do not fund junior companies. The difference between these two types is the focus of their financing strategy.
A venture capital firm typically funds start-ups with high risk. This means that, if the company does not generate substantial profits from the offering, the venture capitalists will not get their investment back. Conversely, tech companies with some level of commercial experience often receive more favorable financing terms. These terms typically include only one or two years of fees as a down payment, a relatively low one-time payment to the company as a whole, and zero marginal costs. In this way, venture capital firms are able to reduce their risk while funding new companies.
As a result of their higher risk tolerance, venture capitalists are willing to fund a relatively new tech company at higher rates. They will provide seed money, seed equity, and/or a combination of both. If a company does not show an acceptable return on their investment, however, they are unlikely to receive funding from a venture capital firm. In fact, there is a current scare in the tech industry about some tech companies being “too good to be true.” (On the other hand, this same bias can be seen among traditional venture capital firms, which have recently funded many “good” but financially weak companies).
Tech companies like to claim that they are not like other technologies. They insist that their business model does not hinge on making customers happy, on providing a great product, or on providing a service that others feel should be available for free. In reality, however, all three aspects of a successful technology company are absolutely necessary to make money. While customers certainly play an important role in the success of a company, it is also vital for a company to take care of its own technological infrastructure.
For this reason, it is likely that a successful venture capital firm will fund a tech company with a combination of traditional, venture capital market know-how, tech-enabled innovation, and customer focus. Venture capitalists will not invest in a company if it cannot make money. As I said at the start of this article, it is likely that there are not going to be an absolute ruling on what types of companies will be suitable investments. Different factors will be going into different investment decisions. Therefore, a smart investor will take a step back and look at the full picture, including both the short and the long-term picture, before making a decision to make or invest in a tech company.