How to de-risk and diversify your venture investments

How to de-risk and diversify your venture investments

Venture investing is a great way to make serious amounts of money, but it’s also a risky form of investment. You can never be sure that a particular company will succeed. An investment might bring impressive returns, but it could also fail completely and leave you with nothing.

With the inherent risk of venture investing in mind, you need to adopt a few key strategies to increase your chances of success. The three main practices to consider are:

  • Affordability
  • Diversification
  • De-risking

By spreading your money around and doing whatever you can to mitigate risk, you’ll put yourself in a position to limit your losses and maximize your chances of earning consistent returns on your venture investments.

Investing in venture capital

When you invest in venture capital, you’re putting money towards a new company that needs funding in order to grow. Lots of entrepreneurs have exciting ideas for the future, but they don’t have enough money on hand to put their plans into practice. As a venture investor, you can give these entrepreneurs the capital they need to scale their companies and pursue their dreams.

If the company goes on to make money, you’ll find yourself receiving a considerable return on your investment. If the company fails, then your initial investment is lost. With venture investing, the stakes are always high. That’s why it’s important to use the affordability, diversification and de-risking techniques that can help you protect your investments.

What is affordability?

An important part of a venture investment strategy is affordability. Many investors are often limited in how many investments they can afford. Most venture investment opportunities have minimum investment requirements. Because of this, you have to determine how many companies you can invest in based on the amount of money you have to invest.

What is diversification?

Diversification is an investment strategy that calls for investing in separate entities so that a single failure won’t be too costly. In the context of venture investing, diversification means putting your money toward multiple companies in different industries. While the number of different companies you should invest in will depend on the scope of your involvement, it’s always best to diversify as much as you can.

What is de-risking?

De-risking is an investment strategy that revolves around limiting the potential costs associated with a given investment. There are many ways that a venture capitalist can make an investment less risky. The most obvious method is to look for companies that seem especially unlikely to fail. You can also focus on equity rather than debt, ensuring that you have an actual stake in the company you’re supporting. Another common strategy is to invest in companies in the Series A stage of funding since these younger businesses won’t require as much investment. Finally, you can consider making a co-investment alongside institutional investors in order to spread the risk.

While none of these strategies will insulate your investments from failure, they serve as vital protections that give your overall chances of success a significant boost.

How diversification and de-risking can improve your venture investment experience

New companies are inherently exciting, and they often turn their brilliant ideas into serious profits. You can be a part of this forward-looking activity, but you want to make sure you’re protecting your investments. Diversification and de-risking make it less likely that you’ll suffer a crushing defeat in the startup world, allowing you to learn more about the process and build a long-term strategy that’s conducive to success.

How to de-risk and diversify your venture investments

While there’s no set of concrete rules you can use to safeguard your venture investments, there are a few general strategies that most savvy investors employ. By sticking to the general principles of diversification and de-risking, you’ll constantly make investments that maximize your chances of coming out ahead. In a process as unpredictable as venture investing, putting the odds in your favor is as good as it gets.

Diversify your investments

Studies have shown that a small percentage of startups provide the bulk of the total returns received by venture investors. That means that of all the companies you consider investing in, only a few will actually make you considerable amounts of money. No matter how much research you conduct, there’s no way to positively identify which companies will succeed. That’s why your best option is to increase the odds by investing in a higher number of companies.

Instead of looking for the one company that could be your ticket to success, identify a list of strong potential investments. From there, take some time to narrow down your list until you’ve landed on a set of final investments. While most of these companies won’t bring you much in the way of returns, you’ll have given yourself a better chance of striking lucky.

De-risk your investments

Always make sure you do your due diligence before investing in a company. Putting your money in an entrepreneur’s hands is a big decision, and you shouldn’t sign off on an investment until you’ve developed a considerable level of confidence in the project.

There are several criteria that you should use to judge a company before making an investment. First of all, make sure that the company’s proposals are logistically feasible. Then, ask yourself whether the startup is offering something truly unique. Finally, investigate whether the business model lends itself to future growth. If all these criteria are met, then you might be dealing with a company that’s worthy of an investment.

Be aware of the risks involved with venture capital investment

Don’t make the mistake of assuming you can remove the risk from venture investing. Startups are notoriously precarious enterprises, and failure is always a possibility. Before making major venture investments, take the time to set your budget. At the end of the day, you should only risk money that you can afford to lose.

Final thoughts on de-risking and diversifying venture investments

Venture investing can be a remarkably profitable exercise, but it’s also full of inherent risks. To make the most of your investing experience, make affordability, diversification and de-risking your three top priorities. You might not be able to eliminate the risks of venture investing altogether, but you can at least give yourself the best possible chance of seeing a return on your investment.

Urban Capital Network’s investment strategy implements this approach for its investors. With a single investment, Urban Capital Network makes all their venture investments affordable, de-risked, and diversified. For only $11K, an investment in Urban Capital Network’s funds gives investors ownership interest in a portfolio of venture-backed, high-growth companies, alongside of institutional investors in various industries and sectors. Contact Urban Capital Network today and learn more about investing with UCN.

Why You Should Invest in a Private Venture Fund of Funds (FOF)

Whether you are just getting into investing or have been exploring different investment strategies for years, among the most effective investments available to you is a private venture fund of funds.

This strategy gives you the opportunity to reduce your risk, increase your returns, and properly diversify your portfolio. If you’re researching venture capital fund of funds, this guide should give you all of the information you need to make a sound decision on if this strategy is right for you.

What Is a Private Venture Fund of Funds (FOF)?

Venture capital is a kind of private equity that allows investors to place some of their assets into small businesses and startups that they believe will grow and become successful in time. Investing in new and unproven companies can make for a risky investment. It’s impossible to predict exactly how a new business is going to perform. Even if the startup has a great idea, there are thousands of other great ideas that never gained any market penetration.

Because each startup and small business performs differently, the returns from one venture capital investment can be completely different from another. You can effectively mitigate the issues that come with investing in venture capital by diversifying your venture capital portfolio. If you have invested in numerous companies, all it takes is for one or two of these investments to perform well for any losses to be offset.

Top-performing venture capital funds are extremely difficult to access. As such, it’s highly recommended that you look into investing in a venture capital fund of funds. This type of investment strategy involves placing your money into a separate portfolio of venture capital funds, which means that you will be effectively investing in multiple companies and startups.

Why Invest in an FOF?

There are many reasons why you should consider investing in an FOF, the primary of which is that doing so will allow you to invest in venture capital without taking on the usual amount of risk. The number of people who are making this type of investment is on the rise because of how advantageous this strategy can be.

Once you’ve invested into an FOF, you will be able to reduce your overall risk and increase potential returns since your venture capital investment will automatically be diversified. Keep in mind that a fund of funds allow you to invest in many different types of businesses, which adds further diversification.

The main reason that an FOF invests in different types of businesses is because doing so protects you from fluctuations in one market. Since you won’t be directly managing your investment, you wont need to do research on the business that you’d like to invest in. The due diligence is handled by the fund of funds manager. If you’re just getting started in the world of investing, placing your money in an FOF is a wise and practical strategy to use.

How Does an FOF Work?

A fund of funds is relatively simple and straightforward compared to some other investment strategies. The fund invests into numerous underlying funds instead of investing directly into securities or companies. As such, your investment is immediately diversified regardless of the amount of money you put into the FOF.

Fund of funds may include funds that have similar or related investment strategies, geography, or industries. Or they may include funds that have no similarities, providing further diversification. The life-cycle of the underlying funds is typically 10 years as with most venture capital funds.

Pros and Cons of FOF Investing

Investing in a fund of funds can be highly beneficial for your portfolio. The primary benefits include:

  • Lower minimum investment requirements
  • Much better portfolio diversification
  • Access to expertise and knowledge of numerous fund managers
  • You won’t need to research companies yourself
  • Can provide high returns with low risk

While FOF investing is a fantastic way to diversify your venture capital portfolio, there are also some issues with this investment strategy that you should be aware of. These issues include:

  • Double layer of fees and interest
  • Venture Capital funds can last for upwards of 10-12 years
  • You may not know what the underlying funds are, which means that you must place trust in the fund manager

Where Can You Invest in a Private Venture FOF?

Many venture capital fund of funds are associated with specific geographical areas, the primary of which is Silicon Valley. However, investing in a fund of funds gives you the unique opportunity to make investments in practically any location around the world. Entrepreneurial talent can be found anywhere. In fact, Urban Capital Network is proving to be highly popular among FOF investors.

Final Thoughts on Private Venture Fund of Funds (FOF)

Investing in a venture capital fund of fund allows you to mitigate the risk of a venture capital investment while leaving open the opportunity for a high return. Even if only one of the underlying funds becomes highly successful, your returns should remain consistent.

There’s also a possibility that multiple funds will perform well at the same time, which could help you bring in high returns. Because of the low risk associated with this investment strategy, it’s ideal for beginners and experienced investors alike.

8 Venture Investment Predictions that Really Stand Out in 2022

The venture capital industry is highly dynamic and constantly evolving, but that doesn’t mean its trajectory is impossible to predict.

Certain developments are already underway, and it’s reasonable to expect they’ll continue their progression in the years ahead.

By staying on top of the latest predictions about venture investment, you can make smarter decisions within the startup space. Here are some of the trends you should expect to continue in 2022 and beyond.

The Continued Rise of Venture Capital

The venture capital industry has been booming for years, and there’s no reason to expect a sudden downturn. In a world where technological innovations can barely keep up with changing dynamics, new companies are needed to fill in the gaps.

All those companies require investment.

With so much money to be made, bold investors will continue to take risks and fund ambitious projects.

1. There Will Be More Investors Chasing After Companies

Companies in the Series A funding phase are likely to see more investors than ever before racing to provide them with funds.

That’s because these companies are in the ideal stage for investment. They’re still growing, and they’ve shown that their products are popular with consumers.

With more money chasing these types of opportunities, the cost of doing business could rise for investors. Entrepreneurs and startups, meanwhile, will benefit from the increased interest in their projects.

2. Companies Will Become More Resilient

Thanks to the coronavirus pandemic and subsequent disruptions, the last few years have been especially hectic. Companies have had to scramble to sort out their supply chains and find enough healthy workers.

Now, these same companies see future disruptions on the horizon as the effects of climate change become more impactful. To deal with all these issues, entrepreneurs and business leaders will start to make resilience a major focus.

Growth will still be the main priority, but leaders will seek a type of growth that can survive in an unpredictable economic climate.

How Technology Will Shape Venture Capital

Technological changes continue to act as a major force in the world of venture capital. Companies and consumers are all looking for ways to become more efficient, and investors will find opportunities by supporting productivity-enhancing technology.

3. Companies Will Continue to Invest in Remote Technologies

The coronavirus pandemic accelerated the inevitable trend toward remote work, and companies are now desperate to make this new model as effective as possible.

In many cases, the key to making remote work more productive lies in new technology.

Startups will continue to churn out software solutions that enhance the hybrid model, and investors will fund the projects that seem most likely to succeed. Remote work will soon become more stable and efficient, and innovative companies will profit from the technology that makes this progress possible.

4. Opportunities Will Arise Around Supporting Freelancers

Today’s workers are increasingly insistent on owning their own time and building flexibility into their routines.

This makes freelancing an especially appealing option. As workers quit their traditional jobs to go solo, they’ll need technological and logistical support.

Forward-thinking companies will step in to supply these new freelancers with the technology they need.

Demographic Changes in the Venture Capital Industry

For a long time, the world of startups and venture capital has seemed insular and even cliquey. While changes aren’t coming as quickly as most would hope, we are seeing the gates to the palace slowly squeak open. In the years ahead, you can expect the venture capital industry to become increasingly diverse.

5. Workforces Will Continue to Go Global

With remote work now entirely in vogue, the startups supported by venture capital are sure to go increasingly global with their workforces.

New technology will make it easier than ever to collaborate across continents, and companies will take advantage of their sudden access to global talent. As the workforce spreads around the globe, new companies will provide technological innovations that make cross-cultural communication more efficient.

6. The Venture Capital Industry Will Become More Diverse

Today’s venture capital industry is significantly less diverse than the American population as a whole. Most of the investors and workers are white males, and the biggest players are alumni from a handful of elite universities.

While this situation won’t change overnight, increased awareness should spur progress.

Macroeconomic Influences on Venture Capital

The world of venture capital continues to exist within a fluid and volatile global economy. Economic trends that begin outside the venture capital industry will inevitably affect how investors conduct their business.

7. The Era of Cheap Cash Will Come to an End

Inflation, caused by pandemic-related disruptions and now settling in for the long haul, will force the Federal Reserve to increase interest rates.

This, in turn, will make funds harder to come by for investors. With the venture capital industry still booming, the increased rates shouldn’t have a major dampening effect. All the same, investors should understand that money will be a little more expensive to obtain.

8. The Muddled Global Supply Chain Will Create Opportunities

The asymmetrical flurry of pandemic-related shutdowns and disruptions has wreaked havoc on global supply chains.

As a result, companies are looking to find backup sources for the goods they need. All this extra sourcing requires logistical support, and innovative technology companies can take advantage.

In the months and years ahead, expect the venture capital industry to invest heavily in software solutions that help companies acquire essential goods and supplies.

Conclusion: Exciting Times Ahead

The last few years have been turbulent, and the future is sure to bring its own disruptions. No matter what surprises 2022 has in store, innovative startups and the venture capitalists supporting them will continue to play a major role in global affairs.

As a world in flux changes its prominent working models and prepares to meet the challenges ahead, expect the venture capital industry to maintain its steady growth.