Investors prefer tech startups

Why investors prefer investing in tech-based startups?

Before going directly to the topic let’s have a look at some statistics of Indian Tech Market.

Indian Tech Industry Statistics

The IT industry in India is an important part of the country’s increasing economy. In 2017, 7.7 % of India’s total GDP was represented by the technology industry and its various subsectors. This number increased in the year 2019.

For the financial year 2019, the tech industry in India generated an annual revenue close to $177 Billion.  This is a significant increase in the generated revenue ten years ago. A majority of this revenue was produced in exports. The domestic revenue equaled around $50 Billion for the mentioned period.

Why investors prefer investing in tech-based startups?

Technology changes so fast that our present gadgets look outdated in just a year. That’s the reason spending on technology is forecasted to grow even more in the future. 

After all, why would you use outdated gadgets when there are newer ones with more features? 

Technology companies can scale incredibly quickly. Scaling is the reason that the top 4 largest companies in the world by market value in 2019 are technology companies (Apple, Microsoft, Amazon, Google).

Now let’s have a look at the reasons why investors prefer investing in tech-startups. The following are the reasons that make investors invest in tech-based startups.

  • Scalability
  • Growing Market
  • Dependency of people on Tech
  • High CAC to CLTV Ratio

Scalability

Scalability in business terms refers to the ability to handle increased market demands. A scalable company/ model is one that can maintain or improve earning margins while increasing the sales volume.

Tech Companies scale at a faster rate due to no physical inventory requirement. And majorly, tech companies use the software-as-a-service (SaaS) model of providing services.

Growing Market

The worldwide spending on technology has reached $3,360 billion (till 2019), and India is also not far behind. The tech-sector in India is witnessing a growth of 6.1 percent year-on-year. It is estimated that the size of the tech industry will grow to US$ 350 Billion by 2025.

The growing market makes it advantageous for tech-startups to get investment and also it’s a good deal for investors too.

Dependency Of People On Technology

An increase in technology has increased people’s dependence on technology. People’s dependency on tech led to this exponential growth of the tech market. This rapid increase has led to the origination of many sub-sectors in Technolgy- Edtech, Fintech, Agritech, Healthtech, etc. As businesses thrive on customers, their dependency on technology is good for the tech industry.

High CAC To CLTV Ratio 

Tech-Startups have a high CAC (Customer Acquisition Cost) to CLTV( Customer Life Time Value) ratio. The majority of the tech businesses offering SaaS have a CLTV to CAC ratio higher than 3 and sometimes as high as 7 or 8. High-profit rates attract many investors to invest in tech-related businesses.

Apart from these 4 reasons, Tech businesses offer less maintenance cost, low risk, a high reward, which makes them an ideal option for investing. 

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2 thoughts on “Why investors prefer investing in tech-based startups?”

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