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The importance of portfolio diversification in startups

The wizened investor understands the importance of portfolio diversification, and will understand how straightforward it has become with the development of the equity crowdfunding industry.

Attracting new and varied investors has been core to equity crowdfunding’s appeal since its inception. As the industry has soared and begun to provide returns to its loyal, early supporters, a varied investment portfolio featuring crowdfunded equities has become increasingly appealing. While retail investors are typically attracted by admiration for an individual product or support for a specific company, more and more are realizing the benefits of a diversified portfolio. Today, Invesdor will asses how investment through equity crowdfunding enhances your investment portfolio, whether you have years of, or minimal, investing experience.

 

Skepticism of equity crowdfunding

Detractors to the industry have long had misgivings over a perceived inability to offer liquidity, which have since been denounced by notable successes from an array of companies. Evidently, there is an inherently higher element of risk, and of reward, when investing in an unlisted company, to which retail investors may not be fully familiar. However, this is also an essential element of a truly diversified and healthy portfolio. 

By eschewing financial advisors, capital raising experts and resources necessary to assess the best practice to diversification, investing in companies through an equity crowdfunding platform allows one to easily diversify the portfolio. Wealthy individuals can use EIS or SEIS funds to diversify in the UK, just as business angels and retail investors can now turn to equity crowdfunding as an innovative means of cross-border diversification.

 

The best alternative

As an alternative to traditional long-term investment, crowdfunded equities demand a waiting period of minimum five years before returns would be viable. This wait may be unappealing to some, but it bears remembering for retail and other investor types that equity crowdfunding attracts a broad range of companies – across the tech, financial and consumer industry, all are recognizing the benefits of the democratized financial regime. Additionally, investors are able to avoid the cumbersome and costly due diligence and fund management fees associated with a large and diverse portfolio.  This frees up larger sums of capital for additional investments. Indeed, such capital may be required for further fundraising rounds that crowdfunded companies occasionally decide to undergo when considering expansion.

 

Becoming popular

Equity crowdfunding rose to popularity for opening up financial services to a new array of investor types, democratizing finance and supporting innovative companies and individuals in the process.  The industry demands fewer capital requirements, allowing all types of investors to diversify more easily than in the past, accessing the full gamut of companies, across the full spectrum of maturity, instantly, without the need for costly advisory services.  The wizened investor understands the importance of portfolio diversification, and will understand how straightforward it has become with the development of the equity crowdfunding industry.

 

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Guest writer
Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.

Tagged: diversification, portfolio, startups, Tips & Tricks

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Invesdor

Written by Invesdor