How to Invest in Rapidly Growing Tech Companies

When Pandora Media (ticker: P) sought seed money from venture capitalists in its early stages, Tim Westergren, a record producer and composer, met with firm Garage Technology Ventures, a Los Altos, California, venture capital firm. Although music wasn't the firm expertise, Pandora was unique enough to command attention.

Instead of pirating music or fighting the music industry, Westergren "had a pathway to being a friend of the music industry," says Bill Reichert, managing director of Garage Technology Ventures.

Pandora worked with musicians to catalogue music types, and then applied a mathematical algorithm to match the taste of people who streamed music online. It used the algorithm to offer new and similar artists to the listener, and gave the option to buy the songs.

[See: High-Tech Investing: 7 Sectors to Watch.]

Generally, when investors give seed money to start-up tech companies, they are locking up their money for a long time. It wasn't obvious Pandora, then known as Savage Beast Technologies, would make millions of dollars for investors. Still, the firm cut Pandora a check in 2000.

"What we look for, since we are a seed and early-stage investor, are companies that have a novel technology that is not easily replicated that gives them a sustainable competitive advantage for some extended period of time," Reichert says.

More than a decade later, the shares that the firm bought for less than $1 soared to $16 in an initial public offering. Pandora stock is now more than $11 and has a valuation of nearly $2.6 billion.

"Pandora was an 11-year overnight success," Reichert says with a laugh.

Tech investment methods vary. Old-school tech investors seed a few companies with cash and then watch them like a generous uncle. As the companies develop, if they are a promising technology, the investment firms often offer more money, Reichert says. The hope is that they will become successful or be bought for a healthy profit by a larger company.

"You don't make your entire bet at the beginning. This is a misunderstanding that a lot of new angel investors have which gets them into trouble," Reichert says. "A lot of angel investors think it's about putting a little bit of money in at the beginning at a low price and then riding it out into the wind. Generally, if you don't have the ability to do follow-up investments, there's a good chance you're going to get into trouble. Because a lot of companies go through bumps along the way and you need to be able to protect your position by investing more."

So-called new-school investors sprinkle money like fairy dust over a large number of firms, hoping a few will succeed or become a unicorn (a tech company that will eventually be valued at $1 billion or more).

The newer investment style might now be creating a "mini-bubble in the seed stage of venture capital, and has caused some of us old school guys to be anxious that start-up companies are getting overpriced," Reichert says.

Startups often fail, and the majority can't raise enough money to keep going, Reichert says, but Garage, which includes rounds of investment funds from both institutional and angel investors, has seen success when it invested in Voke VR (3D live virtual reality), which was recently bought by Intel; LeftHand Networks (data storage), bought by Hewlett Packard Enterprise Co. ( HPE) and Coremetrics (data monitoring), bought by International Business Machines ( IBM).

"If they're a new investor, my recommendation is that they should always join an angel group and work with other seasoned experienced investors and take advantage of the leverage you get working with a group," he says.

[See: The 9 Best Investors of All Time.]

Here are some companies in Silicon Valley and Asia attracting investor attention:

Knightscope. A California tech company with robotic security guards that can patrol, read license plates in parking lots to find out if any are stolen or suspicious vehicles, listen, navigate and provide alerts with 360-degree HD video and thermal imaging. The K5 robots patrol in pairs and sound an ear-piercing alarm if attacked, says Reichert, whose firm has invested in the company. The company says it is "exploring a mini IPO" and has already raised $14 million.

Findo. This firm solves the search problem with computers by using natural human language, which means you no longer need to remember the name or keyword of your file. For example, when Reichert (whose firm has invested in the tech startup) was searching for the name of a person he met a conference, he simply typed, "what was the name of the guy I met at the IBM conference who works with founders?" California-based Findo found an email associated with the conference with the man's name.

Quikr. Launched in 2008, the Indian classifieds company offers a web and mobile based platform that allows users to sell, buy, rent or find things ranging from laptops and mobile phones to cars, real estate and jobs. "The online classifieds markets globally are rapidly consolidating into a limited number of winners, we have seen this play out in China with GanJi and 58.com and believe Quikr is going to be the winner in India," says Upal Basu, a partner in Nokia Growth Partners. The company has gone from an online industry leader to lead across online and mobile media within a short span of time.

Garena. Founded in Singapore, Garena is a social gaming platform with popular global titles ("FIFA," "League of Legends") with "millions of highly engaged users. (They) are able to leverage their user base into other verticals including classified listings, online payments, communication and has the potential for even more initiatives," says Eli Schwartz, the director of international marketing at SurveyMonkey, who served as a mentor in incubators in Thailand, Singapore, Malaysia, Indonesia and Taiwan.

GoJek. This Indonesia company combines motorbike booking with Stubhub, TaskRabbit, Instacart "and anything else that has been migrated to a sharing economy," Schwartz says.

[Read: How to Buy Security Technology Stocks.]

Toutiao. This hot news aggregation app by Beijing Bytedance Technology Co. has more than 450 million registered users with more than 45 million daily active users. Toutiao is considering raising about $1 billion in its latest round, The Wall Street Journal says.

Christine Giordano is a freelance business journalist with a passion to help consumers make educated decisions. Also a columnist for Newsday, you can follow her on Twitter @chrisgiordano.