Early Investing

Invest in Technological Disruption

Invest in Technological Disruption
By Adam Sharp
Date October 23, 2020

These are strange times, economically and socially. The future seems as uncertain as it’s ever been.

At first glance, now might not appear to be a good time to invest in startups. But I truly believe it is.

The primary reason I’m still investing in startups is simple. We are still in the early innings of a technological revolution — across nearly all industries. The companies who can harness technology and use it to automate, grow and simplify their business are winning.

Entire industries are being disrupted by companies. Finance has Square and Stripe. Airbnb has disrupted hospitality. Amazon and Alibaba disrupted retail. Uber changed taxis. Beyond Meat and Impossible Foods are attempting to disrupt the meat market. Facebook changed social life. It’s happening everywhere.

The idea of “disruption” has become somewhat cliche — but real disruption is something we should pay attention to. Massive change is happening due to technological innovations — like cheap bandwidth, mobile phones, open source software and cheap web hosting. Not to mention we have far more tech workers today than ever before. 

Startups Can Take on Incumbents

The best startups are disruptive because they can have some structural advantages over incumbents. Many startup employees are incentivized with stock options, which can be worth quite a bit if the company IPOs or gets acquired. These stock options allow startups to hire better engineering and software talent and are quite a motivating factor for the team.

At a big comfortable company, the team isn’t motivated like that. Big corporations can’t give employees enough shares to match the startup upside. This is a big part of how startups win —  proper incentivization.

Startups also get to start from scratch on a solution, which can be a huge advantage.

Additionally, times like this are just generally disruptive to the incumbent corporate world. There’s way too much debt. And executive pay is way too cushy. Large companies may feel overly comfortable or confident in their operations. This provides opportunities for new companies.

So in an environment like this, I want exposure to young, high-growth companies. I’m not finding those companies in the stock markets today. I see a fair number of publicly traded companies priced like it’s 1999 — with ridiculously high valuations. And most others are still “too high” for my liking. The only good option to invest in small, reasonably-priced tech companies is via private startups.

Yes, prices have risen even in the private markets. But it’s the more mature, proven deals have that become much more expensive though. When you invest at the seed stage, those prices haven’t gone up too much.

So this environment — to me — calls for early-stage bets. Make a lot of small investments, and don’t invest more than you can afford to lose. For most people, no more than 5-10% of your overall portfolio is probably right.

For more on how to get started investing in startups, see this recent Early Investing article I wrote. I provide advice on deal selection and a list of sites to get started investing on.

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