Does investing in future businesses excite you? And why should it not be? It gives us a chance; to be a part of history in the making, to be a part of the future, earn exceptionally high returns,to be a mentor, to be a change-maker. But every big thing comes with risk, and startup investment is no exception. Historically speaking, nine of the ten startups fail! But does that stop us from investing in such a lucrative asset class? Absolutely not! We find a way to hedge this risk and invest in startups strategically and continue our investment. Applying the law of numbers is the best strategy to mitigate the risk of losing your investment. There are different types of startups. The more startups you invest in, the chances to invest in a winner increase.
The first step in a startup investment strategy is to build a diversified portfolio - startup stage diversification, sector diversification, geographical diversification, and demographic diversification. The second step is to invest a small amount initially in these startups and then invest a more considerable amount in the winners of your portfolio.
And the third step is to keep learning and being updated.
In this post, we will discuss the first step, startup portfolio diversification.
Startup stage diversification
The highest-risk startups are early-stage startups. And the highest returns also come from angel investors who invest in these startups. A portion of your startup portfolio should contain early-stage startups who can give you nimble returns and provide agility to your portfolio. They can give you more options in exits, like a future round, merger, or acquisition. The later-stage companies are more focused on bringing an IPO, so exit opportunities are limited and time-consuming.
Diversification across Sectors
Every sector responds and performs differently under different conditions. Who would have predicted the boom in edutech and health tech? And who would have expected the sudden low performance of the hospitality industry or restaurant sector in the recent past? It implies that every industry has risks and rewards, and the trends are often unpredictable. A well-balanced, robust portfolio can give you an edge and required resilience.
Diversification across Geographies
Why invest in startups of Tier 1 cities only, when you can invest in startups across India? The startups from Bharat are solving problems of Tier 2, Tier 3 and rural areas and are catering to larger masses. Why not invest in these startups as well? The macro and micro economic changes can affect your startup portfolio performance, and this geographic diversification can help you connect with a large market and hence higher returns.
Diversification across Demography
A diversified team can bring in intangible benefits. India, a land of diversity, can add to the startup performance; it can connect to the bottom line, build a better image of the company, and prepare the company to face various challenges and threats by bringing in varied perspectives. It has been found in multiple studies that teams with at least one female co-founder performed 63% better than male-only teams, while racially diverse teams performed 35% better than their industry peers.
Also Read: Why it is important to build a startup portfolio?