The Ups and Downs of Multi-Startup Investment: Rewards and Risks

Diversification might seem like a no-brainer when it comes to investing. However, diversification has both advantages and disadvantages when funding multiple startups simultaneously. To ensure that your money multiplies instead of disappearing, you must strategically approach this type of investment with a plan in mind.

When creating a plan to allocate investment funds across various opportunities systematically and organized, it is important to keep several considerations in mind. They will help you ensure you do not regret not backing only one or two entrepreneurial businesses or projects.

1. You will all be better off setting up a balanced portfolio.

One of the major risks of investing in multiple startups is when investors allocate too much of their investment into a single company. This creates an imbalance in their portfolio. While the imbalance isn't an issue if their largest investment succeeds, it can be catastrophic if it fails.

Balancing a portfolio as an investor doesn't necessarily mean dividing your funds into equal pools. Diversifying funding across startups in various industries can help create a balanced portfolio. Investing in startups and established companies seeking additional investors can help diversify your portfolio.

The goal is to reduce your risk by spreading your money across your portfolio to align with your wealth objectives and risk tolerance. Utilizing predictive AI software to create investment models can provide valuable insights into the potential performance of your portfolio. According to VentureBeat, by 2025, approximately three-quarters of all venture capitalists will utilize AI tools. The sooner you start implementing ones that have won awards and high reviews, the closer you'll be to the forefront of investing.

2. You should establish a feasible and realistic monitoring schedule.

You want to keep track of all the startup businesses, products, and initiatives you support. You don't want to get bogged down in the day-to-day changes that can occur. That's a recipe for disaster and anxiety.

Unless you have a vested interest in the daily operations of a startup, it's best to maintain a strict schedule for follow-ups. For instance, you may want to assess the startup's financial performance monthly, quarterly, or other regularly. Establishing a structure prevents surprises and helps you steer clear of making impulsive and imprudent investment decisions.

It's important to align with the entrepreneurs receiving your funding, of course. If you require specific data on the company every three weeks, you must communicate this requirement at the beginning of our partnership. Doing so will position you to have a more collaborative rather than combative relationship with the founder you are funding.

3. It’s your job to stay two steps ahead of foreseeable market volatility and opportunities.

Markets and economies can change in an instant. At no time in recent history was this more evident than during the pandemic. When COVID-19 hit, the global economy was shaken to its core. Nevertheless, some sectors experienced phenomenal growth, such as EdTech. In 2019, international EdTech startups secured about $7 Billion in venture capital support. By 2021, that number had almost tripled.

You may not have a crystal ball, but you can likely identify which investments are expected to perform well and which are inherently riskier. By reallocating some of your funds into "promising investments," you can allocate other funds to support more "early adopter" startups.

Where should you start? A good starting point is to consider emerging laws. For example, investors who foresaw the growing demand for cybersecurity could profit as the industry was on the rise. Today, digital privacy and regulations regarding AI usage are gaining attention. While there is no guarantee that investors who put money into startups address those issues, there is certainly a lot of discussion surrounding the subjects.

4. Use entrepreneurial and organizational business plans to filter out bad deals.

Every investor must set aside their interests when evaluating which startups to invest in. While it's acceptable to trust your instincts in certain situations, relying solely on them can have disastrous consequences for your long-term financial stability.

Construct a checklist to evaluate startup founders' business plans to counteract knee-jerk, emotional responses. The checklist should include all the essential items you need to review from an entrepreneur or company before considering handing over cash. While your checklist can cover a wide range of items, ensure it is comprehensive enough to easily identify significant red flags and minor gaps that could potentially result in major problems.

Once a business plan has passed your checklist, you can evaluate it based on your intuition and raw numbers. After all, there's no shame in supporting a passion project that tugs at your heart. You just need to ensure your mind is engaged in the game. Doing so allows you to confidently stand by your decisions and maintain a positive outlook, even if a startup fails to meet your expectations.

Having the resources to invest in multiple startups is an attractive position. Ensure you are not funding multiple investments without setting up guardrails to protect your money. Ultimately, investing ensures that your money is on track to deliver maximum results. The only way to ensure this occurs is by establishing and sticking to a strategic investing approach.