Does early stage technology investing belong in your personal portfolio? Is it too risky? Should you stick with more predictable asset classes? How could you possibly replicate the results of more experienced investors who have more early stage experience and greater deal flow? These are the questions that need answering before investing in alternative assets, including early stage technology deals.
I’ve long been interested in why investors who are not involved in the startup scene on a daily basis don’t invest a small portion of their portfolio in early stage companies. I got more interested in this question after reading two posts/series in recent months by David Rose (@davidsrose) and Brandon Gadoci (@bgadoci). These posts addressed key questions about investing in early stage technology deals. More on that later.
Your personal psychology is the place you should start in answering these questions. Early stage tech investing is not for the faint of heart; you will see investments go to zero. Some investors are simply not ready for this reality. If that describes you, then early stage tech is not for you.
Conversely, one or more investments going to zero does not define the return of a portfolio of early stage tech investments. In fact, a significant portion of the investments in any early stage portfolio will likely post a goose egg. If you can tolerate that type of uncertainty by keeping focus on the overall portfolio value, then this asset class is an option to consider.
It also helps if you have a working knowledge of the technology marketplace and how innovative companies change and serve markets. This could be obtained from working in the space or from exposure gained in some other way.
If you conclude that you have the risk tolerance profile to consider this asset class, there are several questions you’ll need to answer:
- What portion of your portfolio should you allocate to this asset class?
- How large a portfolio should you have to consider allocating to this asset class?
- How do I maximize my chances of getting professional investor-sized returns in this asset class?
- What are my chances of investing in a company with a life changing exit? Is there anything I can do to increase my chances of such an exit?
- What strategies exist to help me reach these objectives?
- Given the ways the above questions have been answered, how can I get into this asset class?