In a previous post, we delved into the importance of diversification in a start-up portfolio. We looked at ‘The Babe Ruth Effect’ and the number of different positions that should be taken to properly diversify an early stage investment portfolio. Startup investors must be aware that they are going to encounter more losses than wins. Success of a portfolio is based on those few home runs, which drive the overall return. However, there is a degree of nuance and some pitfalls that are worth noting in order to diversify successfully.
Diversification is key to mitigating risk and maintaining a healthy startup portfolio. As media coverage is saturated with news of unicorns like Facebook and Alibaba leading to huge paydays for investors, it’s easy to look past the risk to the possible reward. But it’s important to remember that the majority of startups fail. According to performance analysis by the Kauffman Foundation, 52% of all venture exits are at a loss. How can you integrate diversification into your portfolio?