Consider this your formal welcome to a new year, with new ways to consider investing. If you’ve been considering diversifying your investment portfolio with startup investing – read on for an overview of how to get started.
Yet another diversification conversation
Most financial professionals agree that asset allocation is one of the most important investment decisions, and many recommend diversification across asset classes, as opposed to just picking and purchasing stocks. Spreading your investments across asset classes reduces risk: Obviously, a portfolio comprised of only a few stocks and bonds is susceptible to a big hit should the market suffer a drop; or, even worse, a crash.
Those who divide their investments — not only among different stocks and bonds, but other asset classes, such as cash, real estate, or short-term money market securities, for instance — won’t be as impacted by a downturn. Additionally, paying attention to the particular risk level of each investment, and balancing allocation appropriately, is a way to come out ahead. Depending on what your investment goals are – a child’s college fund vs. retirement vs. recreational – you will need to be mindful, too, of short-term fluctuations of the market.
Private equity in the form of startup investing
These days, in large part due to the rise in equity crowdfunding, as well as the strong track record of venture capital returns in the last few years, more individuals are now turning to startup investment as an additional asset class in which to allocate funds. The trend to expand one’s portfolio to include startup investments is also in large part a result of modifications in securities law in recent years that allow for the inclusion of venture capital investment. The JOBS Act, passed into law in 2012, significantly eased regulation of the crowd-funding community, too, allowing startups the option to raise funds directly from the public, subject to certain restrictions.
If high-tech investing is a strategy you’re considering, the first conversation you’ll want to have with your financial planner is about the VC climate and equity crowdfunding scene, in general, and, then more specifically, what kind expectations you should have for return on your investment. Naturally, you will want to know how long you might have to wait before seeing returns – and come to terms, too, that venture investment is a binary one, in that it might yield high returns or no returns. You might also struggle with determining which opportunity is the right one to back. Familiarizing yourself with the ecosystem, including both success stories and failures, is a way to more confidently allocate funds in this arena.
According to the National Venture Capital Association, activity level of the U.S. venture capital industry continued to increase in 2015 for the sixth consecutive year. In 2015, 718 firms each invested at least $5 million or more during the year, of which 238 invested in first fundings. Ernst&Young, in their 2015 global venture capital trends report, reported $148 billion invested through 8,381 deals— the highest venture capital activity in nearly two decades. In short, a strong fundraising environment in recent years, coupled with some superstar success stories like those of AirBnb and Uber, has generated a momentum that makes venture capital investment even more attractive than it has been in the past.
As with picking stocks, when you’re ready to invest in a tech startup, you might consider educating yourself both about the sector you’re interested in – whether it’s biotech, food security, software or IT – and then watch from the sidelines a bit before making a decision where to invest.
Where Ashton Kutcher comes in
Not every tech investor is going to be as savvy or as successful at first as, let’s say, actor and celebrity deal spotter Ashton Kutcher, whose portfolio (combined with that of his business partner, music manager Guy Oseary) numbers more than 70 investments that including Uber and “a roster of grand slams way past Uber–Skype, Airbnb, Spotify, Pinterest, Shazam, and Warby Parker,” according to Forbes. But there is something to learn from successes like Kutcher’s and Oseary’s, which they credit to being extremely observant, as well as focused on connecting to both a startup company’s founders and its mission.
When he first started investing in startups, Kutcher says, “I spent 90% of my time just listening.” Since then, Kutcher has become “fluent in the language of tech startups, and it isn’t just token jargon.” According to the Forbes piece, Kutcher and Oseary, along with another investor, put $2.5 million into Airbnb, a stake now worth about $90 million. Their $500,000 investment in Uber–both during the seed stage round and in later ones–are now worth more than $60 million. Kutcher and Oseary — using a blend of observation, analysis, risk assessment, and intuition – have managed to get in early as investors in a few unicorns, the term for a start-up valued at over $1 billion.
(According to Investopedia, an investment of $990 on Apple’s initial public offering date on Dec. 12, 1980 would have generated over $300,000 after stock splits and excluding dividends.)
Next steps and resources
Familiarizing yourself with company valuation, ROI (“return on investment”), and market capitalization (“market cap”) is an important step toward deciding how to allocate your assets among venture capital or equity crowdfunding projects. How much traction the company already has, what kind of reputation its founders bring to the table, and what sort of impact its technology is anticipated to make within the marketplace are also key factors in your investment strategy.
Here are a few resources to help get started:
- The First ‘Law’ of Venture Capital
- Risk and Reward: The truth about diversification
- Conquering the Term Sheet: Everything you need to know about deal terms
- Tell-all webinar: Why are these angels investing with online equity platforms?
Oh, and one more thing…
There is one additional draw to adding startups to your investment portfolio; quite a few startups are not only an investment in your own financial future, but in the future of humanity, whether it’s through groundbreaking medical research, disruptive consumer technology, or advancements in space exploration, food security, or renewable energy.
Impact investing, as it’s referred to, can be a meaningful way to give back. To know there’s a chance that your investment might one day lead to the commercialization of a lifesaving medical device or the implementation of an agricultural innovation that brings clean drinking water to impoverished nations is not a motivation to overlook or belittle. This draw could hold, in fact, the most appeal. And, if so, there are a host of much-needed innovations from which to choose.
Here are a few more resources on impact investing:
- Impact Investing 101: How to generate social and environmental impact alongside financial return
- Doing well by doing good: Impact investing in the Startup Nation
Here’s to successful investing in 2017!