5 steps to diversify your startup portfolio

Variety is the spice of life, especially when it comes to investing in startups. If you’re considering investing in early-stage companies (or you’ve already started), use this 5 step plan to diversify your startup portfolio.

Step 1: Know your investment limits

If you haven’t heard, there are limitations on how much you can invest in startups. Regulation Crowdfunding, Title III of the JOBS Act sets forth yearly investment limits based on your income and net worth.

So, before you even begin planning your journey as an early-stage investor, first discover how much you are allowed to invest. 

Use this chart to determine your 12-month limit:

If you prefer an easier method, Crowdwise has a helpful Equity Crowdfunding Investor Limit Calculator (for Reg CF) that will get you an answer in seconds.

Step 2: Decide how much you want to invest

Now that you know how much you can invest, it’s time to decide how much you want to invest, which might not be the same amount.

While there is no single answer to this question—because everyone’s situation is different—you can reach a relatively solid conclusion by breaking down your assets into pieces to give yourself a holistic view of your financial situation.

• To start, draw a pie chart. This represents your investment portfolio. It consists of every asset you have to your name—real estate equity, retirement savings, stocks, bonds, crypto, cash—virtually anything with monetary value.

Now, reserve a slice for your newest asset class: startups.

• Depending on your risk tolerance, your startup slice might only represent a sliver of your pie. 

• This is totally normal. In fact, since early-stage ventures carry such high risk, it’s prudent to only allocate a small percentage of your net worth to this asset class. 

*In other words, don’t invest what you aren’t willing to lose.

Answering these questions will help you get there:

• What portion of my assets am I comfortable setting aside for several years?

• What amount of money would be irritating or agonizing to lose?

Next, choose your percentage. 

• Since startup investing is a risky business, you should always start off small and try to limit your overall exposure to between 5 and 15% of your total net worth. 

Step 3: Decide how many deals you want to invest in 

By this stage, you should feel pretty confident. You’ve discovered how much you’re allowed to invest; you’ve calculated how much you’re willing to invest—but your work isn’t done yet. 

Now, you have to decide how many deals you want to allocate your money to.

• To help you with this step, here’s a story from one of our older posts (“Why you should invest in multiple startups”) that should give you some direction.

The story involves a renowned venture capitalist named Ron Conway. Ron has been described as one of Silicon Valley's "super angels" due to his successful, early-stage investments in companies like Napster, Facebook, and Airbnb.

In the late 1990s, he became famous for investing in more internet companies than any other angel investor. His method was simple: invest small amounts of capital in multiple companies and hope at least one would result in a "home run." 

His approach paid off, mainly due to an investment in a company called Google at a pre-money valuation of just $75 million. The subsequent exit resulted in Ron earning $400 for every dollar he put in. Not a bad return, to say the least.

What can we glean from this anecdote?

To be successful in early-stage investing, you have to give yourself more than a few “at-bats” to find a winner. And don’t think you have to find the next Google or Facebook to turn a profit. Returns of that size are rarely achieved, even for the most seasoned investors. 

Instead, focus on creating a balanced portfolio of businesses with concepts you can easily understand and are passionate about. Then, be patient and wait for the cream to rise to the top—there’s not much else involved.

Step 4: Diversify your portfolio

Proper asset allocation is paramount in any investment strategy. But unfortunately, this tried and true method is largely ignored when it comes to early-stage investing. Why? Because most people view startup investing as less of a science and more of a gamble. 

Such a mindset results in cross-fingered, one-off investments—the kind that yields similar odds to “betting it all on black.”

The truth is, this seldom works out because the odds are stacked against you. While this may seem obvious, the best method to find success is to spread out your risk. In other words, diversify.

As we noted in Step 3, investing in several companies is a great way to spread risk. Similarly, investing across different asset classes is also a popular method to limit your exposure to a specific asset class.

On Republic, you can browse current investment opportunities by sector, enabling you to allocate your capital across various industries and craft a portfolio that suits your needs.

Step 5: Set realistic expectations

Since a startup’s failure rate is so high, it’s important to embrace your losers. Once you realize that losing is a big part of the game, you will start to see the forest for the trees and discover that it’s just a game of numbers.

This can be a hard pill to swallow; humans are hard-wired to avoid danger. In fact, behavioral economists have found that people tend to prefer avoiding losses to acquiring equivalent gains.

Nevertheless, to be a successful angel investor, you need to stick to the plan, even when the going gets tough. 

This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.