| Surely you've heard someone advise you, "Don't | | | | investments in hundreds of companies. At the |
| put all your eggs in one basket"? | | | | same time, Khosla and Conway are professional |
| This is great advice for any type of investing. But | | | | technologists and investors who are deeply |
| why don't private equity investors diversify in this | | | | involved in the early stage deal community of |
| manner? | | | | Silicon Valley - unlike most individual investors. |
| The fact is, the majority of individual private | | | | Join an Angel Investment Network |
| equity investors ("angel" investors) tend to | | | | More and more angel investing networks have |
| under-diversify - they typically only invest in 1 or | | | | been sprouting up in recent years, most centered |
| 2 companies. As a result, these investors increase | | | | around the dynamic innovation hubs of Silicon |
| their risk and decrease their potential for return | | | | Valley, Boston, New York, Los Angeles and |
| on investment. | | | | Austin. These typically involve groups of individual |
| In other words, if you invest in only a handful of | | | | investors who come together to review deals as |
| privately-held businesses, you are holding way too | | | | a group. There are benefits to this approach, |
| much risk. This all-too-common scenario should, | | | | including networking and spreading the costs of |
| and can be, be avoided. | | | | due diligence. However, most angel groups' |
| Instead, investors can build a private equity | | | | investment track records are mediocre as a |
| portfolio that leverages the 20-year average | | | | result of "negative selection bias" as well as the |
| returns of over 20.6% of early stage private | | | | high hurdle (and price) for entrepreneurs to gain |
| equity investments (according to Thomson | | | | access to review by these groups. |
| Financial/DowJones). Indeed, the only prudent | | | | Become a Limited Partner in a Venture Capital |
| approach to private equity investing is to invest | | | | Fund |
| through a portfolio of equity positions. If you do | | | | The most respected firms (like Kleiner Perkins and |
| this correctly, this investing strategy allows you to | | | | Sequoia) are off-limits to the typical |
| leverage the return potential without the risk to | | | | high-net-worth accredited investor. But there are |
| principal that is so common in this class of | | | | hundreds of smaller venture capital and private |
| investments. | | | | equity funds that do accept investments in more |
| How to Build a Private Equity Investment Portfolio | | | | modest amounts from individual investors. Some |
| Of course, creating a private equity investment | | | | of them have good track records of success. |
| portfolio is easier said than done, especially for the | | | | However, the majority of these smaller funds |
| individual investor. There are 3 common | | | | focus on specific sectors, and therefore do not |
| approaches, which all have their drawbacks: | | | | provide the sort of diversified "portfolio" approach |
| Building a Portfolio One Investment at a Time | | | | that most investment advisors would recommend. |
| It's possible to do this, though this should usually | | | | In addition, these firms charge steep management |
| be left to the real "experts." Stars like Vinod | | | | fees that cut into investors' profits. |
| Khosla and Ron Conway have done this, with | | | | |