Having a startup portfolio strategy is at the core of good angel investment practices. Angel investors do not only choose which startups to invest in. They also focus on the shape of their overall portfolio.
One of the key strategies for angel investors’ portfolios is diversification. Angels deliberately seek different colors of startups to mitigate risk. The more diversified, the less the risk on the overall portfolio.
Here we will explore the different ways angel investors can seek diversification. Depending on your goals and time commitment, you can adopt one or more diversification styles.
1. Diversification by Industry
Following the notion of don’t put all your eggs in one basket, angel investors look for good startups in different industries.
One style to diversify by industry is to be industry-agnostic in their investments, meaning they would accept a good startup offer from any industry. Another is to find multiple industries first that seem promising and then look for startups within these industries.
Diversification by industry offers a huge opportunity for high returns. Think of a company like Zoom. Before the pandemic, it was incredibly hard to predict a scenario where a video-calling company would achieve massive returns. For angel investing, it’s too late to enter such a company as the pandemic hit and it was clear it was the right time for Zoom. The best way to be a lucky early investor at a similar event to Zoom’s booming is to diversify by industry.
2. Diversification by Geography
Angel investors are not limited to their home, or any, country. This gives them the potential to ride along with any promising startup ecosystem worldwide.
In general, developing countries have more room for startup growth and more problems to solve than their counterparts. Developed countries, however, are safer and less risky.
Diversifying by country provides angel investors with the good on both sides. It also decreases the risk of all investments dying away from political instability in one country.
Again, investors can either be country-agnostic when choosing startups or deliberately seek startups from several countries. They can also choose startups with the potential to expand, or move operations, to other diversified countries.
3. Diversification by Stage of Development
Startup stages are generally divided into pre-seed, seed, series A, series B, .. etc. The earlier the stage of development, the higher the risk of failure. Based on risk appetite, angel investors choose between these different stages.
In the early stages, startups follow the Power Law demonstrated by Peter Thiel. The law implies that with very small investments in many companies, the investor can gain huge returns from one company which covers the loss from others and adds to the investor’s wealth. This is why some angel investors invest small tickets in multiple early-stage startups.
To diversify across stages of development, investors can simply look for startups in different stages of development and invest. Another strategic way is to start by investing in the early stages only, then add more investments as the startup progresses across the stages.
At VeFund, we have startups from different industries, countries, and stages. Check out our services for scouting, screening, and portfolio management.