Why Angel Investors Should Diversify Across Sectors and Stages for Startup Success
Angel investing offers exciting opportunities but comes with unique risks. Unlike traditional investments, startups are less liquid, have long lock-up periods, and face uncertain exits. Diversification, therefore, is not just a good strategy—it’s essential for managing risk in startup investing.
Here’s why angel investors should diversify across sectors, stages, and even geographies, and why founder selection is a critical component of investment success.
1. The Risks of Startup Investing: Why Diversification Matters
Startup investing can yield high returns, but it’s inherently risky. Studies show that over 75% of venture-backed startups don’t generate positive returns, often due to the high failure rate in early stages. Unlike stocks, which are liquid and have accessible performance history, startup investments are illiquid, with little historical data to guide investors. Diversifying your portfolio helps offset these risks by ensuring that the failure of one investment doesn’t heavily impact your returns.
The Bottom Line: Just as you wouldn’t put all your funds into one stock, you shouldn’t put them into just one startup. A diverse portfolio provides a safety net, allowing you to balance potential losses with gains from successful investments.
2. Diversifying Across Sectors: Balancing Growth and Stability
Each industry has unique dynamics, growth cycles, and risk factors. By investing in different sectors, you’re positioning yourself to capitalize on various opportunities, even if one sector underperforms.
For instance, tech startups in sectors like SaaS or AI can offer rapid growth potential, but they’re also prone to intense competition and market volatility. Meanwhile, health tech or consumer goods startups may show steadier growth and are less vulnerable to short-term shifts.
Example Portfolio:
SaaS for high-growth potential.
Health Tech for stability and demand.
Consumer Goods for consistent market demand.
E-commerce for digital retail growth.
Pro Tip: Balancing high-growth sectors with stable ones can help cushion your portfolio from sector-specific downturns, creating a natural hedge against market shifts.
3. Investing Across Stages: Early, Mid, and Late-Stage Startups
Another key way to diversify is by investing in startups at different stages. Each stage presents a unique mix of risk and reward:
Early-Stage Investments: These are high-risk but offer the potential for high returns. At this stage, you’re betting on a visionary idea and the founder’s ability to bring it to life. Success at this stage can result in exponential returns, but it also has the highest rate of failure.
Mid-Stage Investments: These companies have usually achieved some traction, reducing the risk somewhat while still offering significant growth potential. Mid-stage investments provide a balance between growth and stability.
Late-Stage Investments: These are closer to an exit, typically have a proven product and revenue, and pose lower risk. However, returns are usually lower compared to earlier stages.
The Ideal Portfolio: By investing in a mix of early, mid, and late-stage startups, you’re diversifying your portfolio to include both high-growth potential and more secure, established ventures.
4. Geographic Diversification: Expanding Beyond Local Markets
Investing internationally can open up opportunities in high-growth regions or emerging markets that may differ significantly from U.S. markets. For example, Southeast Asia and Latin America have rapidly growing tech and FinTech sectors that offer unique investment opportunities not found in more saturated markets.
Why it Matters: Geographic diversification allows you to benefit from growth cycles in different regions, while also spreading risk. In addition, some regions may have favorable regulatory environments, government incentives, or unmet demand that could lead to faster growth and profitability.
Example: If your investments are heavily weighted in U.S. tech, consider adding a FinTech startup in Brazil or a health tech startup in Southeast Asia to broaden your market exposure.
5. Founder Selection: The Critical Factor in Startup Success
While diversifying across sectors, stages, and geographies is essential, the most important factor in any startup investment is the founder. Strong founders have the ability to pivot, lead through challenges, and inspire their teams—a crucial determinant of success in the high-stakes startup world.
At Evergreen Mountain Equity Partners, we’ve developed a proprietary founder selection assessment to evaluate whether founders possess the essential traits of what we call an “Entrepreneurial Adaptive Innovator” (EAI). These founders exhibit four core qualities:
Creative Resilience: They’re resourceful, approaching challenges with innovation and agility.
Humble Assertiveness: They lead by influencing others collaboratively and are open to feedback, fostering a culture of adaptability.
Balanced Risk-Taking: They strike a balance between ambition and caution, managing risks without compromising vision.
Strategic Accountability: They take ownership of decisions, learn from failures, and pivot strategically when needed.
Why Founder Selection Matters: Founders with these qualities tend to drive startups toward success, as they’re capable of navigating unexpected obstacles and motivating their teams. By using our proprietary assessment, we’re able to identify high-potential founders who align with these critical traits, adding an extra layer of confidence in our investments.
Download the Free White Paper that explains our proprietary model of founder selection.
6. Putting It All Together: Building a Resilient Startup Portfolio
A diversified portfolio should include startups from multiple sectors, at different stages, in varied geographies, and led by strong founders. Here’s a quick checklist for building a balanced portfolio:
Sector Diversification: Invest across high-growth and stable sectors.
Stage Diversification: Include a mix of early, mid, and late-stage startups.
Geographic Diversification: Look beyond local markets to capture global growth opportunities.
Founder Selection: Ensure the founder has resilience, adaptability, and the vision needed to succeed.
By considering these factors, you’ll have a startup portfolio that’s not only diversified but strategically designed to optimize returns and minimize risks.
Explore Startup Investing with Evergreen Mountain Equity Partners
Diversification is essential for angel investors looking to manage the risks of startup investing. But remember, founder quality remains critical regardless of how diversified your portfolio is. At Evergreen Mountain Equity Partners, we’re passionate about identifying and supporting founders with the unique qualities of the “Entrepreneurial Adaptive Innovator” to help drive our portfolio companies’ success.
If you’re interested in exploring startup investing as an asset class, reach out to us at Evergreen Mountain Equity Partners. We’d love to discuss our approach to founder selection and portfolio diversification and explore how we can support your investment strategy.
