Selecting a Technology Company for Your EB-5 Investment
Selecting a good investment is important for a couple of reasons - 1) ensure the safety and return of your capital along with a return on investment and 2) achieve your immigration target. All investment options that are showcased usually have a good sales pitch. It is here that the due diligence by the investor becomes critical. In other words, you need to ‘kick the tires’ before buying into the business plan proposed by the company. How do you evaluate a good tech company to invest in? There are certain parameters that will guide you in this scenario to weed out the doubtful ones and focus on the ones that show real value over the long term.
1. Proven track record vs. a brand new startup with no proof points
A vision for the future of the company is important. All stakeholders orient their actions and expectations around this vision. While we evaluate the vision for the company three or five years down the line, it is important to look for what the company has accomplished during its existence. Tech startups should typically have been around for two to five years. They should have a good record of bringing new products to the market, established relationships with customers, prospects, and partners in the industry eco-system. A stable and growing revenue stream is also important to validate the products and services provided by the company.
Compare this with a brand new startup that probably has a website and none of the above factors to speak of. The rate of failure in the tech startup world is high, and so there is no guarantee that your investment will be safe and returned with a good ROI along with the capital as promised. Which one would you trust your investment with?
2. Management team with experience and expertise
Experience is the best teacher, especially in the tumultuous world of tech startups. Each startup goes through multiple challenges in its early life. The ability of the management team to rise to the challenge is critical to the success of the startup. Without that, the startup will eventually flounder and the investment will be lost. Always look for a management team that has been together for a long period of time, preferably across multiple ventures. The experience gathered by the team from their past ventures will keep the company steady. Why should you risk your money with an inexperienced team when you can leverage the learnings from the past ventures of the management team?
Review the management team profiles and have a conversation with the team to understand their strategy and tactics for managing the company.
3. Core Intellectual Capital - key differentiators
Defining a unique point of view to address your target industry’s problems is a challenging proposition. So you would come across many startups who are borrowing ideas from the leaders in the industry and improvising on some aspects of the operations to provide a differentiating factor. For a tech startup to grow and realize its full potential, it is important to build and strengthen their own intellectual capital - a secret sauce - that will create a barrier for entry for the competition. Such patentable intellectual capital should also be effectively turned into value for the customers in the form of solutions to real business problems.
So, ask the company about their secret sauce and understand its impact to their customers.
4. Competition - how do they measure up
Constantly monitoring and benchmarking against competition is a key trait of any successful business. Being innovative helps a tech startup to be noticed among established players. A tech startup needs to be nimble and agile to keep abreast of the trends in the industry and leverage changing dynamics. Staying ahead of the competition is essential to continue to grow and gain market share. Being able to lead the innovation in the industry and creating a unique value proposition for customers, partners and other stakeholders is essential for a tech startup to realize the roadmap for growth. While the secret sauce is one part of differentiation, you should also consider the company’s strategy for reaching customers, their pricing model, and partnerships to understand how they are different from the competition.
5. Debt to Equity conversion option due to the exponential growth of tech companies
While all investments have to be at risk, the usual investment structure is that of a syndicated loan from a financial special purpose vehicle (SPV) to the tech company. This will result in a fixed return for the investors during the period of investment. But tech companies experience exponential growth in revenue and you need to be able to participate in that growth. There are a few tech companies that offer the option of investing in the equity of the company once the immigration process is completed and the capital is returned to the investor. This investment would be at a steep discount to the market value, thereby providing investors an option to own a share of the company - an added incentive to consider tech companies as a good investment option.
While the above are a few key areas of focus during the evaluation of any business they are certainly all the more important when you are considering a technology company.