Hi There,
I think by now, you are very well aware of startup investments being a high risk venture to say the least. Not every business becomes successful. In fact, many professionals in the industry will tell you that 90% of startups fail.
This article isn’t meant to dissuade you from the path of investing. History has shown from time to time that investing can ALSO be high reward as well. However, because of the high risk nature of it all, the statement “Do not put all your eggs in one basket” applies greatly here.
In startup investing, diversification is KEY. By Investing in a variety of companies, you minimize the risk involved and maximize your chances of reward. If one investment fails, you don’t lose all your funds in one sitting.
Benefits of a diverse portfolio
- One benefit you get when you diversify is that it allows you invest in different types of companies. Companies that are at different stages of development(pre-seed, seed, series A) and even different industries(health tech, fintech, edutech, tech media, agribusiness, construction, logistics etc). These industries are ever changing and growing and usually attain success at different points in time.
- Another benefit is that it increases your knowledge base of the business world and life in general. It is on you to ensure due diligence is done on the different companies you intend to invest in. This in turn allows you to learn more about the businesses, the type of industry they are in, and the industry’s past and future prospects. This comes with the possibility of becoming a knowledge expert in more than 2 of these industries which will inform not just your investing decisions but decisions you might need to make as a consultant, founder or employee.
- Diversifying your portfolio means getting the chance to meet different people across industries. This allows you to build a more meaningful and diverse set of relationships with not just startup founders but fellow investors as well. Your network they say is your net worth. What better way to build this than a diverse portfolio.
Now that you understand a few of the benefits, what are the key things you need to consider when choosing to diversify:
First, your investment goals
Have you considered these questions before making a choice to invest:
- What are you trying to achieve through investing?
- How much risk are you willing to take on?
- Why do you want to invest in company A?
- How long do you want to be an investor? is this a 5-7 year plan or a 10-20 year plan?
Once you have a clear answer to these questions, then you can make an informed decision to distribute your investments.
Secondly, due diligence
The importance of due diligence can not be overemphasized. Have you done adequate research?
What do you know of the startup’s management team, its financials, its market, and its products?
Are there any red flags you’ve noticed on the legal or financial side of things?
What is the market like? and what are the startup’s financial projections?
The extent of due diligence done on each company can make or mar the prospect of your investment.
Additionally, Do you understand the terms of the investment you are making? A founder may offer equity or convertible debt and its important to understand what that means for you as an investor
In conclusion, here are a few tips for having a diverse portfolio:
- Invest in companies across different industries.
- Invest in companies across several stages of development
- Invest in companies across different geographical areas
- Review your portfolio regularly with time.
Investing in startups can be a rewarding experience but never forget to balance out your risk.
Till next time,
Tolu
