Why is it important to diversify the startups in your portfolio?

Portfolio diversification is a crucial strategy for angel investors, allowing them to spread their investments across multiple startups to mitigate risk and enhance the potential for overall returns. 

By investing in various industries, such as technology, healthcare, and consumer goods, investors can reduce exposure to sector-specific downturns while tapping into different market dynamics. Additionally, diversifying across startups at different stages of development—from pre-seed to more mature ventures—enables investors to engage with varied growth trajectories and risk profiles.

Geographical diversification also plays a significant role in risk management. By investing in startups from different regions or countries, angel investors can navigate geopolitical and regulatory risks while accessing unique markets and innovation hubs. However, this requires a solid understanding of international market conditions, taxes, and regulations.

Moreover, supporting diverse founders brings added value, as varied backgrounds and experiences can play an important role in each startup  success potential. An old say, ‘ideas are worth a dime’, emphasizes the importance of being able to execute and the team is a key element to that.

A fundamental principle of diversification is to avoid concentrating investments in just one or a few startups. Statistics suggest that from a pool of ten startups, only three may yield returns, with just one potentially providing substantial gains to offset losses from others. 

Many angel investors join syndicates or groups that facilitate diversification without the burdens of deal flow management and due diligence. These networks allow for shared resources, insights, and co-investment opportunities, although it remains important for individuals to build their own portfolios across different syndicates.

Ultimately, by adopting a diversified investment strategy across industries, stages, geographies, and founder backgrounds, new angel investors can manage risks and position themselves for better returns in startup investments. Continuous research, seeking mentorship from experienced investors, and adapting strategies over time are also essential practices for optimizing returns in this dynamic environment.