When investing, your capital is at risk.
What does it mean to diversify your portfolio?
Before we get into the how, let’s understand what it means to diversify your portfolio. Portfolio diversification is a financial discipline that minimises the risk of long-term investing by spreading your investments across different assets and asset classes. For example, you may have investments in real estate, crypto and jewellery, alongside your public and private market investments.
The aim of diversification is to reduce the shock of financial disruption to your investments should something happen. When you invest for the long term, naturally the value of these investments will fluctuate. However, sometimes, an investment may fail. If all your investment capital is in one asset class, you could lose everything. By diversifying your portfolio, you’re reducing that risk by having multiple assets that do not rely on each other.
The figure above shows two pie charts. The left chart demonstrates a general diversified portfolio, the right chart presents a diversified portfolio within startups. (The percentages of the portfolio allocation on figure one should not be taken as financial advice. This is solely to explain how diversification works).
In this article, we’ll be taking it a step further to understand how to diversify your portfolio when investing in early stage startups.
Why is it important to diversify your portfolio in startups?
Not every investment will be successful.
We always hear stories about those investors who placed bets on startups like Facebook or Uber in its infancy and became multi-millionaires overnight. Firstly, it wasn’t overnight. Secondly, those investors didn’t just make one investment in those companies. They most likely invested in several businesses, many which failed, and found success in just a handful.
You don’t want your investments to be too similar to each other.
Let’s take an example from a similar article we published about the importance of startup diversification.
Andy, an everyday investor, decides to invest half of his investable capital into an ice cream company, and the other half into an umbrella company. During the summer months, the ice cream company performs well and returns a profit. However, as there’s less rain, the umbrella company doesn’t do as well. Andy has diversified his portfolio by investing in two startups that are not affected by the weather at the same time.
You can’t predict future markets.
When the pandemic started, travel was restricted and this took a big hit to the travel, tourism and hospitality industries. Using Andy as an example again, had he invested all of his investment capital into travel and tourism startups, 2019 to 2021 would’ve been a very tough period.
However, Andy diversified his investments over real estate, climate-tech and fintech startups. The overall risk of his portfolio was reduced by investing in companies not directly correlated, which means that they did not influence or depend on each other.
How to diversify your portfolio when investing in early-stage businesses: 4 practical tips
- Do your research
It’s important to understand what you’re investing in and why. For some investors, they want to see high returns so they pour more capital into fast-growing, high-risk industries at an early stage. On the other hand, you may want to support a company you love and see them do well.
Make sure you understand what you’re investing in and what your capital will be used for. On Seedrs, investors have access to forums and bi-weekly Bitesize pitches where founders can answer questions directly and assuage any concerns you may have.
- Invest in different industries
Like the example above with Andy, investing in different industries helps to reduce risk if one industry is experiencing an economic decline. You may also find your diamond in the rough (the startup that becomes the next big thing) in a completely different sector to what you may have imagined.
- Invest through an established and reputable platform
Unless you know a founder directly who’s raising capital for their business, it can be hard to get in on exclusive deals. We advise investing through a credible platform like Seedrs or Republic, where you’ll have access to many opportunities. We carry out a thorough due diligence on all businesses raising capital on the platform to ensure our investors are protected and have access to the best deals.
Revolut, a digital banking alternative, raised £3.8 million from 4,260 investors as part of their $66 million Series B round. Since that time, their share price has increased by over 5,022.5%. Revolut has gone on to become an established British fintech unicorn with their latest valuation at $33bn in 2021. The best part? Investors have had the opportunity to realise returns now rather than waiting for a sale or IPO, which typically can take up to 10 years, through our Secondary Market.
You can check out active campaigns here.
- Speak to a financial advisor
This article aims to explain the importance of a diversified investment portfolio. Please note that Seedrs does not provide legal, financial or tax advice of any kind, and nothing in this blog post constitutes such advice. If you have any questions with respect to legal, financial or tax matters relevant to your interactions with Seedrs or its affiliates, you should consult a professional adviser.
Ready to diversify your portfolio with some private investments? Check out these fast-growing European startups on Seedrs raising capital now.