Seedrs Blog

Why diversification matters

Why diversification matters

31st May 2013 by Thomas Davies

A core principle underlying the whole Seedrs approach is that investing in startups can be highly profitable so long as you have a highly-diversified portfolio. We built Seedrs to allow both big and small investors to build a diversified portfolio of startups instead of being stuck in just one or two risky deals. Diversification is the key to success in angel investing.

Diversification makes intuitive sense in any asset class, but it’s vital in an asset class such as startups where most investments will fail but the ones that do succeed can do so in a big way. Diversification is also supported by the data: the “Siding with the Angels” report by Professor Robert Wiltbank (Nesta, 2009) shows just how skewed the distribution of returns inside a portfolio can be and why that makes diversification vital.

We’ve now come across an interesting new visualisation that shows this in even starker terms, and we wanted to share it with you. Using similar research from a U.S.-based report written by Professor Wiltbank, Kevin Dick has demonstrated just how important diversification is by correlating the probability of a particular return with the size of the portfolio of startup investments.

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For any given amount of money that you wish to invest in startups, rather than invest the entire amount into one startup, you are likely to achieve stronger returns if you invest smaller amounts across a larger number of startups. You can see the rest of Kevin’s article at:

http://possibleinsight.com/2013/04/25/visualizing-angel-diversification/.

Thomas Davies

Thomas Davies

I'm the Chief Investment Officer for Seedrs.

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