The Venture Capital field is full of challenges. There’s no foolproof way to uncover a magical unicorn company. There’s never 100% certainty of the profitability of a company. A lack of resources or an insufficient team can put a strong idea on the chopping block. So, how do we find these companies? How can we increase our odds?
When a Venture Capital Firm invests in companies, the general rule is that one-third of the portfolio will go to zero, another third will narrowly break even, and the final third will generate all the returns for the VC firm. This can appear daunting, but where there are big losses, there are even bigger wins. That’s the appeal of Venture Capital. Historically, six percent of a firm's investments generate 60 percent of all venture returns (Axes, Forbes).
All the same, we need to attempt certainty. When building a venture portfolio, there are two routes to take: specialization or diversification. You can specialize in one type of company. This could range from focusing on one field, one region, or one stage of development. Or your investments can come from all over, and focus on different areas. Experts once favored specializing and believed it improved the odds of profit. Why wouldn’t you want to know the ins and outs of one industry? Shouldn’t expertise lead to gain? We don’t think so.
If we look at the internal rates of return (IRRs) as a measure of profit we can see diversity’s benefits. Mixed funds have a median IRR of 13.5%, while industry-specific healthcare funds have a median IRR of 6.7%. Global funds outperform solely North American funds at 11.5% to 10.2%. North America was once viewed as the best place for VC, which highlights the true gravity of a 1.3% difference (Boyman, IMD).
Plum Alley is no stranger to dealing with a diverse portfolio. While we do focus on a technology-based industry, we don’t see this as a hindrance. We can explore nearly 15 different sub-industries, including robotics, food and ag tech, AI, sensors, and more. We have an extensive knowledge of the companies of the future, while having a broad reach across many sectors. Our broad reach continues into geographic diversity, as our companies are from over 20 different countries.
Diversity is integral to the success of a venture capital firm when it comes to selecting startups. Still, its value doesn’t end there. Investing in diversity affects you, the investor, as well. By investing in venture capital firms, you battle market volatility by having a myriad of investments in your portfolio. The venture field is unlike your short-term stock portfolio as it won't fluctuate with the public market. You get a long-term steady investment with front-row tickets to innovation.
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