Portfolio thinking for small startup investors

Professional startup investing is built as a portfolio. The reason is the shape of the outcomes: a large number of companies return little or nothing, and a small number account for most of the money that comes back. A fund is a machine for holding enough companies that the second group has a chance to appear. A person with a small amount of savings is not that machine. This note explains the difference. It does not suggest a number of companies to buy or a share of savings to commit.

What the fund is doing

A venture fund raises a pool, pays managers, and invests across a list of companies over several years. It can often put more money into the companies that are working, which is a second decision, not an automatic right of the first cheque. It reports to its own investors under a contract. The person who wanted ‘exposure to startups’ and buys one name has bought that name. They have not bought the fund’s list, the fund’s follow-on rights, or the fund’s ability to wait.

What a small investor usually has instead

Angels sometimes approximate a portfolio by investing in many companies over a decade, with enough money left for later rounds. That still requires sums that can be lost, and time. Equity crowdfunding makes a single ticket easy to buy and a serious portfolio hard to assemble: each offer has its own documents, its own country rules, and, in the US regime, resale limits. Five tickets on one platform, in one year, in companies that all sell to the same customer, are one theme. They are not diversification. The EU crowdfunding regulation and the SEC’s crowdfunding rule both exist to govern the offer. Neither converts a short list into a fund.

Money that cannot be lost is the wrong money

The FCA’s description of investment-based crowdfunding includes the possibility of losing all of the capital and not being able to sell. Any amount committed has to be an amount the household can lose without missing a bill, a school fee, or a repayment. That is a description of the risk, not a formula for how much to commit. A portfolio of risky claims does not become safe because it contains several of them. It becomes a portfolio, which is a different and still risky object.