Diversifying and Finding Investment-Worthy Startups

Editor’s Note: Welcome to the Early Investing Mailbag. If you have any questions you’d like us to answer, please email us at mailbag@earlyinvesting.com. Just remember, we can only answer your general questions for information and strategy. We can’t offer personal advice.

Q: Can you explain to me how diversifying in crypto works, or even if it works?

A: First, let’s talk about whether diversifying your crypto portfolio even works. There’s no hard data to say yes or no. Crypto is just too new.

The only study containing hard data I could find was done by the Bocconi Students Investment Club (under the auspices of Bocconi University) in Milan, Italy. It applied Modern Portfolio Theory (published in 1952 by Harry Markowitz) to crypto and generated good results, beating all the other portfolios.

They claim they chose coins of low covariance (meaning one coin’s highs correspond to another coin’s lows). That’s where they lose me. I don’t see much of that in the crypto space. Instead, I see the vast majority of coins moving up and down together – a little more so when moving down than up (but not much more).

Okay, so why diversify?

For the same reasons we urge our readers to diversify in startups. We’ve said it a million times: Most startups fail. Same goes for crypto: Most coins fail.

And it doesn’t matter how good an investor you are. You will not have good outcomes for 60% to 90% of your investments. To play the odds, you need to make a bunch of investments. Just one or two isn’t enough. Odds are you’ll lose out on both of them. You need to make at least 20 investments – whether it’s cryptos or startups.

If you’re having trouble wrapping your arms around this concept, think of baseball players. A good player hits for a .300 average, right? That’s a 30% success rate.

He’ll have plenty of 0-for-3, 0-for-4 and 0-for-5 games in a season. Dozens, I’d say. Yet, take a span of 10 games and let’s say, 30 at-bats, and you’ll see eight to 10 hits with some singles, doubles and maybe a home run or two.

That’s how your gains work in crypto (and startup) investing. Thirty holdings will give you some single-digit winners, some double-digit winners and hopefully some home runs (or four-baggers of 1,000% or more).

Yes, cryptos tend to move up and down together, but at some point they’ll go their separate ways, with some making long sustained climbs and some making precipitous falls.

That’s why diversification is an extremely effective tool for managing your portfolio.

+ Early Investing Co-Founder Andy Gordon

Q: Where do I invest in startups? And how do I choose which ones to invest in?

A: There’s now a wide selection of startup investment portals to choose from. Here are a few we like:

With dozens of investments available at any given time, it can be difficult to choose. We highlight what we think are the most promising deals (and our reasons why) for our First Stage Investor members. If you’re doing research on your own, my advice is to take your time and start investing small amounts in companies you believe have a good chance of succeeding. Over time, you’ll learn to spot the promising opportunities.

Generally speaking, I look for a few things in startup investments:

  • Founders who are passionate about the industry
  • Disruptive technology
  • Rock-solid execution.

+ Early Investing Co-Founder Adam Sharp