Diversification Means More Than Just “More”

“... innovation is more about programmatic
disciplined effort, carried out over time in a
well-considered portfolio approach,
than it is about serendipity."

- Deloitte Insights, 2017

One of the challenges of being an angel investor is having enough diversification that the odds are high that one or two companies will “make your fund”. Except for carry, an angel investor is essentially a venture capital fund with one limited partner: you. You pay fees to lawyers, accountants, governments, restaurants, and airlines. You work with your portfolio companies to protect your investments. Those investments have the same risk profile depending on the stage and sector. And you want the same or better returns. But without significant diversification your risk is far higher.

Whether it’s Kauffman Foundation or the Angel Capital Association, the evidence is in that angel investing only works if you diversify. So no matter how much you love the company that’s in front of you, make sure it is only one of at last 20 investments in your portfolio. The evidence has also proven that you need some knowledge of the sector you are investing in to avoid the hype and to understand market structure.

All of that goes double for emerging industries such as space, blockchain, IoT, or AI. Add ‘investor’ to you profile on LinkedIn and within minutes your inbox will be filled with entrepreneurs pitching their latest crypto hedge fund or machine learning startup. Are some of them real? Sure. But how do you tell unless you know that industry inside and out? You can ask experts but is that really a well reasoned and disciplined investment thesis? How much of your ‘fees’ will you be spending trying to figure that out?

If you are considering early stage technology companies as a part of your overall portfolio, you should consider doing it through a fund either alongside your targeted investments or as a co-investor with the fund. Whether it’s a local angel fund focused on a mix of local real estate and tech deals or a sector specific fund with world wide reach, you can’t beat the diversification and knowledge of a well run VC fund. If the minimums are too high talk to them anyway, many will help bundle you with other smaller investors into an SPV.