Choosing the Right Startup Investment

Investing in startups is one way to diversify your investment portfolio. However, if you’re new to investing in general, or have only dealt in traditional asset classes like stocks and bonds, there is a lot you should know before you start adding startups to your investment portfolio.

Before you ever lay eyes on a pitch deck, you should know what your risk profile is, what industries pique your interest, and what your game plan is in the long-term.

Understanding Your Risk Profile

Your overall investment strategy and the kinds of investment you make should be reflective of your personal risk profile. Two key components that factor into your risk profile are:

  1. Your time horizon
  2. Your risk tolerance

Time horizon is when you plan to potentially cash in your investment and the rate at which you anticipate using those funds. Younger people who have many years ahead of them before retirement have the advantage of time when it comes to weathering ups and downs. This means that they could potentially assume a higher level of risk with the goal of long-term appreciation. Conversely, someone who is closer to retirement may be less willing to assume high levels of risk, as those funds will likely be needed sooner.

Risk tolerance is your general attitude toward risk. Alternative assets, like startup investments, are highly risky, while traditional assets such as government and high-quality corporate bonds typically carry less risk. A good rule of thumb is to ask yourself if you would be okay if you lost the investment in its entirety. If the answer is no, that is not an investment you should be making.

Another thing to note is that your risk profile is not fixed. It can change over time with age, life circumstances, and changing investment goals.

MicroVentures Investor Profile

When you sign up as an investor with MicroVentures, we ask you a series of questions to help you determine your risk profile, including your anticipated return on investment time frame, your risk exposure, past private equity investments, and your investment objective. These questions help you better understand what types of investments are best suited for your goals and level of risk. Generally, we categorize investors into four levels of risk:

  • Low
  • Moderate
  • Speculative
  • High

Depending on the investment vehicle, startups investments typically fall into the speculative and high risk categories. Because of this, it is generally advised that startup investments make up a small percentage of your overall investment portfolio.

Find Your Niche

Once you know whether or not startup investments are suited to your personal risk profile, you can begin to consider what types of startup investments you would like to pursue.

Many angel investors and venture capitalists focus on a certain niche. This can be an industry that you’re already passionate about or something that you have a growing interest in. A good example of an investor who has found their niche is Reid Hoffman, who co-founded LinkedIn. His focus is on consumer internet and social networks. Another example of an investor who has found their area of focus is Arlan Hamilton, founder of Backstage Capital. She is passionate about investing in founders of color, women, and those in the LGBTQ community.

This isn’t to say you need to choose one industry to invest in and that’s it. However, experience in – or knowledge about – the spaces in which you might invest may help make better informed investing choices.

Set Realistic Return Expectations

We’ve written many different blogs on how to analyze a startup for its investment potential, such as vetting the founding team and conducting due diligence, to assessing their financial statements and general business health. In addition, you should consider a reasonable timeline for a potential return, taking into account the business, the industry the market, and your own investment timeline, and set your expectations accordingly.

There is no way of knowing when – or if – a startup will generate investment returns. Early-stage startups, like many of the investment opportunities we offer on the MicroVentures platform, are long-term investments. If you’re looking for a return on your investment within the next few years, early-stage startup investments will generally not meet those expectations.

Interested in learning more about the investment opportunities currently listed on MicroVentures? Head over to the offerings page to browse early and late-stage investment opportunities.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.





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