Investing in startups can lead to outsized returns and diversify your portfolio in ways traditional stocks or even cryptocurrencies may not. Here's a guide on why you should consider adding startups to your investment mix and how to get started.
Why Add Startups to Your Portfolio?
High Returns Potential: Startup investing offers the possibility of significant returns, with 100x or even 1000x returns not uncommon in successful ventures. Traditional stocks or crypto often cannot match these potential gains.
Diversification: Startups, especially at the early seed or pre-seed stage, are less correlated with general market trends. Their success largely depends on the company’s growth and execution rather than macroeconomic factors like interest rates. This diversification can protect your portfolio from broader market swings and improve portfolio’s risk/return profile (Sharp ratio).
Encouragement and Learning: Investing in startups offers the chance to collaborate with smart founders and get an insider view of business growth. Unlike public stocks, where your interaction is limited to quarterly reports, startup investors can witness firsthand how a business is built and operated.
How to Start Investing in Startups
Crowdfunding Platforms: The most accessible entry point is through platforms like AngelList or Republic, where you can begin investing with relatively small checks—sometimes as low as $1,000. However, these platforms may not always offer the best deals.
Venture Capital Funds: Investing in venture capital (VC) funds exposes you to startup portfolios managed by professionals. Look for VC funds that offer co-investment opportunities, allowing you to invest alongside them in specific startups, which can provide valuable learning experiences and deeper involvement. These start with higher checks ($100-250k), but you get exposure to a diversified venture portfolio as opposed to a single-name risk.
Direct Investments: Direct investing offers the most hands-on approach if you’re willing to source and vet startups. Investment checks usually start at $25k per company. Attend startup pitch competitions and conferences to discover opportunities. Be prepared for failure, as many startups do not make it to the growth stage, therefore a good rule of thumb could be allocating enough capital to at least 10 names.
Startup investing is an excellent way to diversify your portfolio, gain uncorrelated exposure, and potentially increase your overall returns. Additionally, the learning opportunities from engaging with founders and emerging industries can be invaluable.
To get started, explore crowdfunding platforms, invest in VC funds, or attend startup events.
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