Raise your next round on StartEngine. Apply Now
Raise your next round on StartEngine. Apply
Get iOS App Sign Up
September 7, 2019 | 6 Min Read

Why You Should Diversify Your Startup Portfolio

startup portfolio

Why You Should Diversify Your Startup Portfolio

We’ve all heard that we should diversify our portfolios. It’s the most cliched piece of investment advice there is, and it’s also one of the best, whether you’re investing hundreds or millions of dollars. 

The basic principle is simple. The market, overall, has consistently trended upwards, despite peaks and valleys. However, individual assets fluctuate in value all the time. So, when you have a narrow selection of assets, you’re vulnerable to those fluctuations.

On the other hand, if you have a broader collection, you’re more likely to capture the gradual upwards motion of the market—the rising tide that lifts all boats. You’re closer to the average, and the average is quite good.

What’s less remarked on is that we believe you should diversify types of investment. In other words, put your eggs in a number of differently shaped baskets. Make some safe bets, but also make some more speculative, high-risk, high-reward, selections. This way, you can effectively make your investments reflect your attitude towards risk (and if you aren’t a risky sort, then there’s always the good old savings account). Empirical study has revealed that this is one of the most important elements of portfolio design.

This can be hard to conceptualize since securities aren’t tangible objects. So, imagine diversifying risk with physical investments. First, you buy a big chunk of gold, because gold has done fairly well over the long-term. Then, you buy a few Renaissance paintings, because classical art, while not a guaranteed good investment, is less risky than contemporary work.

Finally, you buy some interesting collectible cards.  Sure, most of them will be worth nothing in twenty years, but did you know that occasionally, collectible cards can yield some surprisingly large returns. Who knew that a single playing card could be worth $166,000?

In this way, you’ve selected a mix of conservative, less conservative, and more speculative options. The same can be done when designing an intangible investment portfolio.

The Allure of Startup Investing

Of course, perhaps the most interesting of the speculative options is the start-up investment. While start-ups have traditionally been reserved for big-time investors with a lot of capital to throw around, thanks to companies like, say, StartEngine, you can now moonlight as an angel investor.

The allure of start-ups is obvious: the returns can be, at times, quite impressive. For example, Sequoia Capital Investments netted a 50x return on its investment in WhatsApp. That’s the kind of return that sounds like a scam: if someone calls you and tells you they can increase your money by a factor of fifty, you should probably hang up immediately. And to be fair, WhatsApp is a rarity; most startups fail well before investors can see a return (more on that in a bit).

But back to the point at hand, normally, in the stock market, you’re content to earn 1.1x on your capital, since that would place you slightly above the average historical return of the S&P 500.

However, the appeal goes beyond money. There’s also something intellectually engaging about start-up investing, something that just feels compelling about getting behind emerging companies.

First of all, they’re not faceless organisms. The founders are people you can talk to on Twitter, and you’re there with them as their dreams become reality (or don’t.) 

As well, on a larger scale, when we put our money in start-ups, we can become part of the forces of innovation that change the world, whereas when we invest in big stalwart companies, we’re investing in the world as it is. There’s nothing wrong with that, of course, but it feels good to get behind innovators who are shaping the future.

The Argument for Diversification

But that’s where the drawback of start-up investing comes in. Unfortunately, it’s difficult to shape the future, and that’s why nine out of ten start-ups fail. So, we believe the intelligent way to back start-ups is—you may have seen this coming—making diverse investments. Rather than having a bunch of safe investments and then a big slice of one exciting start-up, it might be wise to have ten smaller, and still exciting, slices.

Here’s a simple example. Let’s say you invest equally in ten start-ups, and most of your choices are terrible. Eight of them fail catastrophically. The money you invested in them vanishes, and perhaps you start to feel like start-up investing isn’t for you.

One of them, Mediocrely, grows slightly and stalls out. You don’t lose your Mediocrely money, but you would’ve made more if you’d simply put it in index funds.

However, one of them, Examplefy, is different. It’s what they call a “unicorn” in venture capital circles: not just a winning horse, but a horse of another variety. It gives you a 15x return. Congratulations: you’re a successful venture capitalist. By picking mostly failed companies, you’ve made a profit.

Of course, it’s also just as likely that you pick all failed companies, but such is the risk and the allure of startup investing.

The VC Model

To experienced VCs, this goes without saying. As well, by VC standards, 10 is a tiny number of investments. The emblematic story is that of Ron Conway, who made a dazzlingly high number of investments in the 90s. It’s not known how prolific he is exactly, but he mentioned in 2012 that he’d invested in over 650 companies, which gives you a sense of the numbers at issue. One of those early investments happened to be Google, and now Ron Conway is quite financially comfortable.

Even relatively conservative VCs spread their cash around to many different companies. Star investor Peter Thiel, in his book Zero to One, suggests that he only invests in ultra-profitable firms that could become monopolies—firms that do things that are so distinctive that they won’t experience direct competition. “At Founders Fund,” he writes, “we focus on five to seven companies in a fund, each of which we think could become a multibillion-dollar business based on its unique fundamentals.”

This is not to say that you need to invest in 68 start-ups immediately, but that after you find one start-up that excites you, consider finding another. 

It’s difficult to embrace the idea that most start-up investments fail, and that even the best investors make a lot of bets that don’t work out. It requires being humble about how much we can know, which is a difficult thing to be humble about. 

However, there’s also an exciting side to this unpredictability: the realization that there’s no telling where the next big innovation is coming from. Some brand-new technology will always take us by surprise and shock us with its success. When you make diverse start-up investments, you’re really just keeping an open mind about what the future could be.


Get Started:

Want to stay up to date with the latest posts from StartEngine? Sign up here:

You May Also Like

Important Message

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. INVESTMENTS ON STARTENGINE ARE SPECULATIVE, ILLIQUID, AND INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT.

www.StartEngine.com is a website owned and operated by StartEngine Crowdfunding, Inc. (“StartEngine”), which is neither a registered broker-dealer, investment advisor nor funding portal.

Unless indicated otherwise with respect to a particular issuer, all securities-related activity is conducted by regulated affiliates of StartEngine: StartEngine Capital LLC, a funding portal registered here with the US Securities and Exchange Commission (SEC) and here as a member of the Financial Industry Regulatory Authority (FINRA), or StartEngine Primary LLC (“SE Primary”), a broker-dealer registered with the SEC and FINRA / SPIC. You can review the background of our broker-dealer and our investment professionals on FINRA’s BrokerCheck here. StartEngine Secondary is an alternative trading system (ATS) regulated by the SEC and operated by SE Primary. SE Primary is a member of SIPC and explanatory brochures are available upon request by contacting SIPC at (202) 371-8300.

StartEngine facilitates three types of primary offerings:

1) Regulation A offerings (JOBS Act Title IV; known as Regulation A+), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Primary, LLC (unless otherwise indicated). 2) Regulation D offerings (Rule 506(c)), which are offered only to accredited investors. These offerings are made through StartEngine Primary, LLC. 3) Regulation Crowdfunding offerings (JOBS Act Title III), which are offered to non-accredited and accredited investors alike. These offerings are made through StartEngine Capital, LLC. Some of these offerings are open to the general public, however there are important differences and risks.

Any securities offered on this website have not been recommended or approved by any federal or state securities commission or regulatory authority. StartEngine and its affiliates do not provide any investment advice or recommendation and do not provide any legal or tax advice concerning any securities. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. StartEngine does not verify the adequacy, accuracy, or completeness of any information. Neither StartEngine nor any of its officers, directors, agents, and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, or completeness of any information on this site or the use of information on this site.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid, and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks, and you should complete your own independent due diligence regarding the investment. This includes obtaining additional information about the company, opinions, financial projections, and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. See additional general disclosures here.

By accessing this site and any pages on this site, you agree to be bound by our Terms of Use and Privacy Policy, as may be amended from time to time without notice or liability.

Canadian Investors

Investment opportunities posted and accessible through the site will not be offered to Canadian resident investors. Potential investors are strongly advised to consult their legal, tax and financial advisors before investing. The securities offered on this site are not offered in jurisdictions where public solicitation for offerings is not permitted; it is solely your responsibility to comply with the laws and regulations of your country of residence.

California Investors Only – Do Not Sell My Personal Information (800-317-2200). StartEngine does not sell personal information. For all customer inquiries, please write to contact@startengine.com.

StartEngine Marketplace

StartEngine Marketplace (“SE Marketplace”) is a website operated by StartEngine Primary, LLC (“SE Primary”), a broker-dealer that is registered with the SEC and a member of FINRA and the SIPC.

StartEngine Secondary (“SE Secondary”) is our investor trading platform. SE Secondary is an SEC-registered Alternative Trading System ("ATS") operated by SE Primary that matches orders for buyers and sellers of securities. It allows investors to trade shares purchased through Regulation A+, Regulation Crowdfunding, or Regulation D for companies who have engaged StartEngine Secure LLC as their transfer agent. The term “Rapid,” when used in relation to transactions on SE Marketplace, specifically refers to transactions that are facilitated on SE Secondary, This is because, unlike with trades on the StartEngine Bulletin Board (“SE BB”), trades on SE Secondary are executed the moment that they are matched.

StartEngine Bulletin Board ("SE BB") is a bulletin board platform on which users can indicate to each other their interest to buy or sell shares of private companies that previously executed Reg CF or Reg A offerings not necessarily through SE Primary. As a bulletin board platform, SE BB provides a venue for investors to access information about such private company offerings and connect with potential sellers. All investment opportunities on SE BB are based on indicated interest from sellers and will need to be confirmed. Even if parties express mutual interest to enter into a trade on SE BB, a trade will not immediately result because execution is subject to additional contingencies, including among others, effecting of the transfer of the shares from the potential seller to the potential buyer by the issuer and/or transfer agent. SE BB is distinct and separate from SE Secondary. SE Secondary facilitates the trading of securities by matching orders between buyers and sellers and facilitating executions of trades on the platform. By contrast, under SE BB, SE Primary assists with the facilitation of a potential resulting trade off platform including, by among other things, approaching the issuer and other necessary parties in relation to the potential transaction. The term “Extended”, when used in relation to transactions on SE Marketplace denotes that these transactions are conducted via SE BB, and that these transactions may involve longer processing times compared to SE Secondary for the above-stated reasons.

Even if a security is qualified to be displayed on SE Marketplace, there is no guarantee an active trading market for the securities will ever develop, or if developed, be maintained. You should assume that you may not be able to liquidate your investment for some time or be able to pledge these shares as collateral.

The availability of company information does not indicate that the company has endorsed, supports, or otherwise participates with StartEngine. It also does not constitute an endorsement, solicitation or recommendation by StartEngine. StartEngine does not (1) make any recommendations or otherwise advise on the merits or advisability of a particular investment or transaction, (2) assist in the determination of the fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Invest in StartEngine

190% YoY Growth: Invest in the leading equity crowdfunding platform.

This Reg A+ offering is made available through StartEngine Crowdfunding, Inc. This investment is speculative, illiquid, and involves a high degree of risk, including the possible loss of your entire investment. For more information about this offering, please view StartEngine’s offering circular and risks associated with this offering.

 

Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

Founder's Summit Application