What Are The Things To Consider When Investing In A Software Company?

According to the Corporate Finance Institute, the combined value of FAANG stocks as of October 18, 2022 is US$ 3 trillion. FAANG stocks are Facebook, Amazon, Apple, Netflix and Google.

Also, most of the technology companies particularly US software companies are in the S&P 500 which is one of the highest yielding investment stock group in the USA. Even people from outside of the US invest in it because of this.

Some of the richest Americans, Chinese and Europeans own or used to own software companies. Some of these people are: Elon Musk (Tesla), Jeff Bezos (Amazon), Bill Gates (MicroSoft), Larry Ellison (Oracle)…

These men didn’t grow rich but rather became rich because of owning a software company. This is one of the best thing about software companies, they can be started even by a college student right in his own dormitory like Mark Zuckerberg.

Family and Friends: Believe it or not but there are investors who are family/friends with the owners of the software company. Chances are, you for example have a family member or friend with an app idea and they need funds to support themselves while they create their app.

Angel Investor: You might be a rich person such that many approach you for business funding. This is the annoyance and the benefit of being rich. The annoying part is the constant hounding of people who want money. The benefit is that you see a lot of moneymaking ideas.


Venture Capital: You might also invest your money with a venture capital (VC) company. It is a well known fact in the VC industry that most investments made thru VCs fail. So, be very careful of investing in a VC company. Always analyze their investing track records.

Perhaps you are the owner of a company or is working for one. In this case, your company can invest in software technologies that would increase the earnings of your company especially if your company is already using the software.

You can also invest in software companies via crowdfunding. One of the biggest benefits of crowdfunding is that the backers of the companies doing crowdfunding can see if there is any interest in the company via the number of people/groups funding it.

Although it is always good to know that a company has a lot of capital to begin with, this is not really an issue with software companies. This is because unlike companies that manufacture physical products, software companies can actually be started and maintained cheaply.

Consider the manufacturing of a physical product like for example t-shirts. A t-shirt company must buy high-end sewing machines and if the t-shirts have prints, a printing machine. Then there is the delivery costs like packaging and transport vehicles.

Now consider software products which can be created using only PCs/laptops and an internet connection. PCs/Laptops are very affordable and the software product can be sent to the buyer via the internet. It’s this cheap.

Another thing to consider is that computer programmers are getting cheaper and cheaper to hire because computer programmers from developing countries are cheaper but can go toe to toe with computer programmers from developed countries.

Imagine if you’ve invested in Facebook while Mark Zuckerberg was just perfecting it on his dormitory. You could have been a very rich person now. So, don’t ignore software companies just because they’re working out of a basement. They can be the next Facebook.

There is a big reason why many investors would rather invest in softwares that let users input data rather than the software company inputting data. This is because these kind of softwares can easily scale.

For example, MicroSoft has the Word text editor, the Excel spreadsheet and the PowerPoint presentation software. All that MicroSoft has to do is program these software once and the users of these software use them repeatedly.

As such, the value of these software increases the more they are used. The same is true for social media softwares like Facebook, Twitter, Instagram and so on. The owners of these softwares don’t have to create data content, their users do it themselves.

Compare this with website blogs where the owner of the website has to continuously create data in order for the blog to continue to be viewed. Website blogs are very hard and may be very expensive to scale.

This is the reason why not many investors invest in blogs, YouTube channels and the likes. Rather, the investors invest in the software platform for blogs and videos like Blogger and YouTube. Consider this when a blogger or YouTuber asks you for funding.

It is a well known fact that many amateur company owners with unique products are very wary of possible competitors who may copy their product. The same is true with owners of software companies.

For example, both Apple and MicroSoft sued Google for software patent infringement because Google used the Android operating system. In response, Google bought Motorola which have software patents used by Apple and MicroSoft.

In the end, Apple, MicroSoft and Google all agreed to drop their court cases against each other because they all know that each one has an ace up their sleeves against each other and are basically in a stalemate position with each other.

It must be noted that each of these companies own several thousand software patents and the mobile phone alone as a product is composed of more than a thousand patents from varying companies.

So, before investing in a software company see to it that the software company you’re investing on isn’t violating some other company’s patent. A software company could easily get bankrupt if a big software company like Apple goes after it for software patent infringement.

Nowadays, it is very easy to copy a software based on its appearance. For example, in the gaming app industry, there are multitudes of Slot Machine apps in both the Apple App Store and the Google Play Store.

There is even a genius pair of app developers who created a software that would create slot machine apps automatically. Their software was so good that it was able to create thousands of slot machine apps before being discovered by Google.

If you are an app developer of slot machine games then of course you would be doomed by these kinds of softwares. But even without these slot machine app making softwares, there are already too many slot machine apps that the competition for users is so great.

This is the reason why companies like Google keep their computer algorithms a secret. If ever Google’s computer algorithm is discovered, all that their competitors need to do is program the algorithm and they can go head to head with Google.

This is the reason why you as an investor must especially invest in software companies with hard to copy computer algorithms and software programs. This is for example one of the reasons why Google’s search engine completely dominates the market.

The goal of every software company is mass adoption. Many software companies are prepared to lose money just to gain the most number of users/clients. In fact, this is the goal of almost all technology companies and not only software companies.

It is a well known fact for example that ride hailing technology companies like Uber, Lyft, Grab and so on are still losing money for each ride taken by their customers. For example, Uber’s market domination in some parts of the world has been a result of this:

They use the capital money given to them by their investors to recruit as many contract drivers as possible. This kind of strategy is pretty well known in the technology investment industry and is fast losing popularity because of its low and even non-existent return on investment.

Compare Uber with the likes of Facebook who managed to be mass adopted by users while at the same time also being very profitable. The value of a software can be easily seen by the number of users who use it on a repeated basis. Users don’t have to be coerced into using it.

For example, Facebook became popular among university students even without Zuckerberg spending anything on advertising. The same is true for Google. If a company earns from advertising instead of spending on advertising, its a good sign for the software company.

A good software company with a good software product can cheaply scale. It is not a good sign for a software company if they spend a lot of money just so that users would use their product. It is even worse if these same users don’t become permanent users of it.

You should also invest in a company without patent issues. This means that it is very hard for their competitors to sue them for software patent violations. It also means that the software company’s software algorithms and the software programs themselves are hard to counterfeit or copy.

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