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.