A Beginner’s Guide to Building and Diversifying a Portfolio by Investing in a Startup

Investment Portfolio

Investment Portfolio

An investment portfolio contains various classes of financial assets that an individual invests in. It contains stocks, bonds, and cash, among others like ETFs or Exchange Traded Funds and closed-end funds.

A judicious allocation of the different classes of assets in your investment portfolio could guard you against insurmountable losses if you were to put all your funds in an excessively risky asset in anticipation of huge returns. A diversified portfolio is a way to go for striking the perfect balance when allocating funds for investment.

Physical assets such as cars and buildings do not qualify as investments to be included in your portfolio.

A Balanced Investment Portfolio

After carefully assessing your risk tolerance, the next step is to create a portfolio that gives due cognizance to this factor. A balanced portfolio will have a proper mix of stocks – riskier but high return investments and bonds – a safer investment with relatively low returns.

In addition, if you are to add investment in startups to your portfolio, it will increase the magnitude of risk. This is because startups have lean chances of success. On the one hand, where some startups turn into multi-million dollar companies, almost 90% of them fail.

As an investor, you will always face a trade-off between risk and return. There exists an inverse relation between them. Startups that have made it big have offered exponential growth to their investors who were willing to invest their funds in a highly risky venture.

Why Invest in a Tech Startup?

Taking a look at the current scenario, most technology-driven companies have adopted the startup culture. These companies start small with meager investments, going on to raise funds through angel investors and venture capitalists before moving on to an IPO or acquisition.

By the time successful startups gear up for an IPO, they have already experienced a huge increment in their net-worth, thereby providing their investors a high rate of return on investment.

As an individual, you too can make substantial profits by incorporating startups that align with your tastes and preferences in your investment portfolio. However, do not go overboard with your investments in tech startups because even though a handful of them have the potential to make your investment a huge success, a significant percentage of them fail and can cause financial distress.

What you need to do is to design your portfolio in a manner that minimizes your risk. If you want to play it safe, invest a significant amount of funds in bonds that are like safe investments. Having done that, you can put your stakes in a tech startup.

The returns from bonds act as a cushion and can offset the losses from startup investment, if any. On the flip side, if the startup turns out to be a success, you can reap huge returns.

How to Invest in a Startup as an Individual Investor?

Gone are the days when one faced constraints in investing in startups. The process of startup funding saw investments by the founders, friends, and family or individuals with high net-worth, popularly known as angel investors. In the larger scheme of things, venture capitalists and big financial institutions like investment banks lend financial backing.

However, with crowd-funding platforms, you can successfully diversify your investment portfolio and be a part of the success story of budding startups.

Although it is important to make hay while the sun shines, it is also imperative that you do not give in to investors’ ‘animal spirits.’ Investing in a startup entails undertaking huge risks to bag huge returns. However, one needs to take calculated steps towards their investment goals.

Individual Investor

Selecting a Portfolio of your Preference

Not only is it important to curate an investment portfolio with lucrative assets, but also diversify it with a different class of assets. The types and proportion of assets that make up an individual’s investment portfolio will weigh heavily on its success. There are three types of investment portfolios:

  • Aggressive: An aggressive portfolio is suited for a risk-loving individual who also happens to be comfortable with the idea of locking up his/her investment for a long period.
  • Conservative: A conservative portfolio is appropriate for investors who do not have a risk appetite and prefer safer investments. In addition to their low tolerance for risk, they also prefer investing for a short period.
  • Moderate: A moderate portfolio is suitable for an investor who is neither a risk-lover nor risk-averse. The period of investment is moderate in this case.
Selecting a Portfolio

Benefits of a Diversified Investment Portfolio

We all are familiar with the success stories of Apple, Facebook, Google, and Microsoft, some of the world-renowned startups of all time. The overwhelming reception garnered by them and record-breaking performances in terms of financial gains might even tempt you to invest in startups.

But just investing in a startup in anticipation of exponential gains without thorough research might lead you to incur huge losses or little to no return on investment.

On the bright side, if you were to conduct proper market research and carefully analyze the gaps that the startups aim to bridge through the product and services offered by them along with the efficacy with which they operate, you can even realize massive gains.

However, make sure not to put all your stakes in a single organization. To put it rather simply, build and diversify your investment portfolio by investing in a tech startup in addition to other investments.

Key Takeaways

To summarize, investing in a tech startup is a desirable option for enterprising individuals who have no qualms in undertaking risks and can lock up their investment for a significantly long period of time – 3 to 5 years at least. If that suits you, then keep the following pointers in mind:

  1. Keep yourself updated about startups you wish to invest in
  2. Decide your appetite for risk and allocate funds accordingly
  3. Try to be an early investor in startups by being active on crowd-funding platforms
  4. Build your portfolio with due diligence
  5. Diversify your investment portfolio with a different class of assets keeping in mind your risk and return preferences.

Enlighten yourself with other investment strategies to get high returns on the funds at your disposal.