Private market investing can present an opportunity for investors seeking to invest in startups. Unlike public markets, where stocks are traded daily, private investments involve longer holding periods and higher risk—but also the potential for growth. For investors, constructing a well-balanced private market portfolio requires a thoughtful approach that aligns with individual financial goals, risk tolerance, and time horizons. In this blog, learn more about portfolio diversification and building your ideal investment portfolio while investing in startups.

Building Your Ideal Investment Portfolio

Why Invest in Private Markets

Potential Returns

Private market investments, which include venture capital, private equity, and pre-IPO opportunities, can offer advantages over traditional public market investments. One benefit is the potential for returns. Startups can experience growth before they undergo an exit event, allowing some early investors to participate in the potential growth.

Diversification

Additionally, private markets can provide diversification. Because these investments are not directly tied to the daily fluctuations of public stock exchanges, they may be able to help mitigate overall portfolio volatility. This can be particularly valuable during economic downturns when public markets may underperform.

Early-stage Innovation

Finally, investing in private companies can grant access to innovation at its earliest stages. From breakthrough technologies in artificial intelligence to transformative healthcare solutions, private markets allow investors to support cutting-edge developments before they reach mainstream awareness.

Despite the benefits of investing in private markets, it’s important for investors to remember that all investments are inherently risky, and startups and private markets carry a significant degree of risk due to the long holding periods, uncertainty, illiquidity, and many other factors.

How to Build Your Investment Portfolio

With all the associated risks of investing in startups and private markets, building your ideal portfolio requires careful consideration to balance your risk tolerance and investment goals. The following are some steps to take to help build your investment portfolio.

Step 1: Define Your Investment Goals and Risk Tolerance

Financial Objectives

Before ever making an investment, it’s important to clarify your financial objectives and comfort level with risk. Start by assessing your investment time horizon. Private market investments typically require a minimum of five years to mature, with some early-stage ventures taking a decade or more to yield potential returns. If you anticipate needing liquidity in the short term, private markets may not be the right fit.

Risk Tolerance

Next, consider your risk tolerance. Early-stage startups, while they can offer potential growth, they also carry great risk of failure. On the other hand, late-stage private companies and pre-IPO rounds may provide more modest upside. Your personal risk appetite will determine how you balance these opportunities within your portfolio.

For example, a conservative investor might focus primarily on late-stage companies with proven revenue models, while an aggressive investor may allocate heavily to seed-stage startups with disruptive potential. Many investors fall somewhere in between, opting for a balanced mix of early and late-stage opportunities.

Step 2: Organize Your Private Market Portfolio

A well-structured private market portfolio can help mitigate risk through diversification. Here are some segments to consider: investment stage, industry sector, and geographic location.

Diversification by Investment Stage

Private companies progress through distinct funding rounds, each with different risk and return profiles:

• Pre-Seed and Seed Stage: often little more than an idea or early prototype. These opportunities require patience, as exits may take seven to ten years, or even more.
• Series A and B Rounds: companies that have demonstrated some market traction but are still in growth mode.
• Series C and Later Rounds: more mature companies typically with established revenue streams. Holding periods are often shorter than pre-seed or seed stage.
• Pre-IPO investments: involve companies who may be considering going public.

Diversification by Industry Sector

Concentrating investments in a single industry can expose your portfolio to sector-specific downturns. Spreading capital across multiple sectors can help mitigate this risk.

Technology remains a dominant sector in private markets, encompassing areas like artificial intelligence, software-as-a-service (SaaS), and financial technology. Healthcare, including biotech and medical devices, offers growth potential driven by scientific innovation. Consumer-focused startups, such as e-commerce and direct-to-consumer brands, can benefit from shifting retail trends. Climate tech and clean energy are emerging as critical sectors as the world transitions to sustainable solutions. Real estate, particularly through property technology (PropTech) and private REITs, could provide income potential.

Diversification by Geography

While the United States remains the largest hub for private market activity, international markets can also offer valuable diversification.[1] Europe, Asia, and Latin America each present unique opportunities driven by local economic conditions and innovation ecosystems.

Step 3: Determine Your Allocation Strategy

Avoid Overconcentration in Private Markets

Given their illiquid nature, an investor should consider if private investments fit into their overall portfolio. Conservative investors might limit private market exposure, while moderate investors may be able to invest more. Those with higher risk tolerance may focus on the private markets due to their ability to take on risk.

Develop a Disciplined Investment Checklist

Before committing to any private market opportunity, evaluate it against a standardized set of criteria. Assess whether the investment aligns with your overall portfolio strategy and risk tolerance. Scrutinize the company’s valuation to ensure it’s reasonable relative to its growth prospects. Evaluate the strength of the management team and the size of the market opportunity. Finally, consider how the investment affects your portfolio’s diversification—does it spread risk or concentrate it?

If you don’t feel comfortable making and assessing investment opportunities on your own, a financial professional may be able to help you determine your portfolio allocation.

Final Thoughts

Building a private market portfolio is comparable to a marathon, not a sprint. Private markets are inherently risky, and investors should carefully consider portfolio allocation based off their risk tolerance and investment goals. Diversification can be a tool to help minimize investment risk, and investors should consider consulting a financial professional.

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Failing Forward: What Investors Can Learn from Failed Startups
• Untapped Potential: Investing in Emerging Sectors
• How to Start Investing in Startups
• Building Connections: Networking Tips for Investors

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

 

[1] https://www.moonfare.com/pe-masterclass/private-equity-market-size

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.