16 Oct 2015

A Mutual Fund for Startups

Investing in startups is risky. What if you could reduce the risk by investing in dozens of startups at once, as with a mutual fund? Would that give you high returns along with an acceptable level of risk?

An analogy is buying an individual company’s stock. This is risky. The company could suffer a stock price decline, leaving you with a loss. By contrast, investing in a mutual fund diversifies your investment, reducing risk without reducing return.

Why isn’t this concept available for startups?

For example, why isn’t there a mutual fund that invests in startups that have gone public [1]?

Or, going one stage earlier, one could argue that a VC is in effect an aggregator — instead of investing in many individual startups, you invest in the VC firm itself, which spreads your money over many individual startups. But each VC firm has access to only a small subset of startups, so to reach the broader market, you need to invest in many VCs. More importantly, you want to diversify away the risk that a VC firm makes bad bets. So why isn’t there a mutual fund that invests in a couple of dozen VC firms across the world [2]?

Or, going one step even earlier, why can’t I easily contribute 1000 rupees each to a hundred crowdfunded projects, say on Kickstarter? Why isn’t there a mutual fund-like vehicle that distributes my money across selected Kickstarter projects, selected based on the fund manager’s view of which ones are likely to be successful?

It will be interesting to have these options for investing in dozens of startups across various stages, like seed capital, venture capital and as public companies, without the overhead of making dozens of individual investments.

[1] One can define a startup in various ways: by how long it’s been listed in the stock market (say, for at most one year), by its market cap, by how long it’s been in business (it’s hard to argue that a ten-year-old company is a startup).

[2] Or at least your country, if regulatory issues get in the way of making global investments.

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