Investing in startups offers a way to diversify your investment portfolio & potentially earn higher returns.
This is a great strategy to use especially when you’re looking to earn passively & big. This provides exposure to high growth, private assets that generally do not correlate with public stock markets.
Due to high failure rates, effective diversification requires spreading 20-50+ startups across various sectors, stages & geographies to reduce risk & capture outsized returns from “unicorns”.
Investing in multiple startups prevents one failure from damaging your overall portfolio, as the majority of startups fail while a few winners often drive the total returns as the ‘Babe Ruth Effect’. The Babe Ruth Effect is a metaphor for startup investment in that all failures that may occur, one home run can deliver exponentially lucrative returns.
Each startup investment is usually preceded by extensive due diligence; periods of in-depth research into the business, key considerations include the management team, business model, target market, money & momentum-often termed the 5ms of startup investment.
During this process, in which you question every aspect of the company, you may unearth signs off systematic, financial or personnel-related risks. At this stage, you can uncover these risks & either decide not to invest or, if you intend to be reasonably hands-on as an investor, help the entrepreneurs address them.
Startup investing gives you some influence over performance of your interests. This can be especially beneficial if you choose to back companies in your area of expertise.
Written by,
Mifund Founder Thapelo