What Does a Diverse Startup Portfolio Look Like?
I’m certain you’ve read the headlines. FTX has collapsed, pulling down dozens of crypto firms in its wake and rocking some of the biggest VCs in existence. Yet one of the now-defunct exchange’s largest investors, Sequoia Capital, isn’t bankrupt. Why?
Diversification. If you look at any professionally managed fund, they invest in at least 10 companies – sometimes 15 or more. And Sequoia is no different. To be clear, the firm did suffer a major loss, but the fund overall still looks quite good for its limited partners. This is the power of diversification.
It’s hard to pick winners, and it’s especially hard to pick just one winner. I’m sure before November all of FTX’s investors thought they had a home run. Wouldn’t you have thought the same, with all the hype? Well, for many investors this mistake was fatal. Not so for those who had a proper diversification strategy.
What’s true for Sequoia, is true for the rest of us.
Startup investors should take note and, in my view, own at least 10 early-stage companies in their portfolio.* Why? These businesses have a high-risk profile. They may fold overnight OR make investors a huge multiple on their money. So the right strategy is to place a lot of bets.
Alternative assets are more than just early-stage startups. They can also include investments in comic books, trading cards, wine, and real estate. That means, as an investor, you can diversify across entire asset classes. A good place to start, I think, is 5% of your portfolio in early-stage companies, 5% in collectibles, 5% in real estate, and the remaining 85% in traditional highly liquid mutual funds, ETFs, and bonds.
With equity crowdfunding, you have every reason to own a diverse portfolio. Why? The entry fee is usually quite low – around $250 for most offerings. So if the goal is 10 early-stage investments, that means you can begin building a properly diversified startup portfolio for around $2,500. Turns out, boosting your odds of success is easier than you think.
*This does not constitute investment advice and bears no relationship to any specific issuers.
