Out of the 600,000-plus new businesses incorporated in the U.S. this year, the vast majority will fail to deliver at least a 1x return to their investors.
You read that right: the chances of profiting from a single investment is minimal, to the say the least. Sure, all it takes is one good investment to win big, but you can lose big on one bad investment, too.
That’s why many startup investors hold stakes in not one or two startups, but dozens. By diversifying your portfolio, you can offset potential losses, minimize risk, and maximize your chances of success. All you need is one big winner to make up for any lost profits.
Not just for millionaires
Before we get to the why, you need to understand the how.
Startup investments used to only be available to partners at investment firms and angel investors — essentially people with a high net worth. Anyone who didn't meet these qualifications were left to make their dough in public markets like everyone else.
Today, companies like Republic (that's us) offer startup investing to non-accredited investors and accredited investors alike. Thanks to the 2012 JOBS Act, investing in a startup via crowdfunding became a real thing that anyone could do. Now, the ability to invest in startups is open to Americans of all backgrounds.
That said, why should people invest in multiple startups as opposed to one?
Take on less risk
The more you invest in a single company, the bigger the risk you run of losing everything if that venture fails. As Fred Wilson, co-founder of Union Square Ventures explains:
“Our target batting average is ‘1/3, 1/3, 1/3’ which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.”
In other words, you don’t want to put all of your chips on red. By placing small bets on multiple companies, you land more chances at getting the jackpot.
Get more bang for your buck
In the same way that diversification reduces risk, it also opens up to tremendous opportunities for success. This is especially true for angel investors; every small investment you make increases your chance of a big payoff if a company succeeds.
Consider Ron Conway. In the late 1990s, Conway became famous for investing in more Internet companies than any other angel investor. He thought that by investing small amounts in multiple companies, he’ll land at least one home run investment.
Conway’s home run was Google.
Invest across industries
When you diversify you portfolio, you're not stuck investing in one sector; you can invest across multiple industries. This allows you to simultaneously invest in different markets and earn on some of the hottest consumer trends.
You don’t need to be an expert in a specific industry or field to invest. Angel investing allows you to diversify in startups working in healthcare, beauty, AI, insurance, real estate, and more at the same time. All it takes is one idea to take off for you to earn big.
Where do you start?
At the end of the day, it comes down a simple numbers game. You don’t want to put everything into an investment only for it to fail. When trying to decrease risk and maximize your reward, portfolio diversification is the name of the game.
This is where Republic can help. We carefully vet companies across industries for anyone to invest in. Our minimum starts as low as $10, so it’s easy to place small bets in companies and diversify your portfolio, all on the Republic platform.
Learn more about the importance of startup diversification, and our unique feature called Autopilot, here.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.