There is far more to tech investments than chasing FANGs
Region's tech startup scene makes for some interesting investment plays
Technology can be intimidating - whether using it or investing in it. The year of the pandemic has made us all more reliant on tech than ever before.
From buying groceries to communicating with colleagues and clients, the algorithms of lockdown life are reshaping everything we do. In truth, that process was already well-established long before the world had heard about COVID-19. Technology, in one way or another, has been at the heart of the changes to our lives at home and in the workplace, which are increasingly one and the same.
This is one reason why we are seeing valuations in the tech sector reach record highs. It also, in part, explains how the $30 trillion-plus market capitalisation of the S&P 500 has become so skewed towards just a handful of stocks.
Shining lights and then what?
The pace of change in the sector has been so rapid and disruptive that it has challenged our ability to keep up. This is especially vexing for investors who often have access only to the most visible publicly traded part of the industry, limiting their investment opportunities to only the most established tech behemoths that occupy a monopoly in the market – the likes of Facebook, Apple, Netflix, Google and Amazon.
But what of the tech giants of the future? Herein lies the issue. By largely catering to offer investment opportunities amongst more established tech companies, traditional investment models leave investors shut out from some of the most exciting prospects. And the ability to get in earlier in the company’s lifecycle, at better value and with far greater upside to realise.
In earlier stages, high growth tech is where investors stand to gain the most and at a more attractive entry point.
Chase the untested
The baby teeth of the technology sector - those tech start-ups that are nourished by VC - are much less visible to investors, even though this is where some of the biggest potential prospects are to be found. It represents a huge opportunity for Gulf investors to play a vital funding role at the early stages of a new technology name.
With that early involvement comes the potential for much greater reward through participating long before the inevitable extraction of value that occurs later in their lifecycle. As new tech names grow and become publicly traded entities, investor dilution inevitably occurs as there are more shareholders to satisfy and more advisers to pay.
When it comes to tapping into the opportunities of earlier stage technology investments, partnering with well-established tech investment and venture capital markets can offer significant upside for Middle East investors.
More than 13,000 kilometres separate the capital of the Gulf from the innovation of Silicon Valley. It can feel like a very long way, which is why global partnerships at the government, corporate and investor level are so vital in bridging it.
The benefits of such partnerships are already visible in the region such as in the closer ties between the UAE and other tech-rich economies from China and Singapore to Israel.
This is not just about the flow of capital but rather it is a necessary step toward greater diversification within the region. It helps to make the case for investing in the Gulf’s own emerging technology hubs and industries of the future.
As regional economies move away from their historical reliance on hydrocarbons and toward a more digitally-focused future, interest in establishing local technology hubs is on the increase. Recently Abu Dhabi revealed its own Technology Innovation Institute aimed at boosting the status of both the emirate and country as a global hub.
Harness, nourish
Developments of this kind are helping to change perceptions about the Gulf while also paving the way for more homegrown tech start-ups to flourish in a supportive environment. This all contributes toward greater awareness about the sector among the region’s big providers of capital.
Still, for some investors, this may require a different approach and a willingness to look beyond the familiar.
Without access to tech’s most exciting companies before they become the next Amazons or Googles, regional tech investors risk missing out on early access to the world’s the next crop of tech titans. Innovative, forward-looking partnerships will play a major pare in delivering much needed investment diversification and value creation long term.
- Rohit Nanani is Director at Arrow Capital. Arjun Sethi is a Partner at Tribe Capital.