Venture capitalism is a challenging business to be in. It requires a strategic approach to many different factors, such as portfolio management, risk diversification, legalities due diligence and networking.
The more diversified your venture capital portfolio is, the more the risk of individual investments failing is mitigated. Diversifying is a personal choice, meaning there is no right or wrong combination of assets. That being said, each decision surrounding your portfolio should be considered carefully. Here are some tips to help you manage your venture capital portfolio effectively.
Investors look at past investments
Although it can be easier to only focus on one project at a time, you should be planning your next moves whilst executing others.
Other investors will look at your portfolio as an indicator of the sort of business you conduct, and this can inform their decision about working with you. Flexibility is key, so being able to move with a changing market helps but be prepared to explain your sudden changes.
Have a strong decision-making process
All venture capitalists will make decisions differently – that’s part of the beauty of the business as it keeps things fresh and exciting. Making sure that you have a stringent process to adhere to each time ensures that every partner has a predetermined say and responsibility in the business.
As well as creating a strong office culture, you will be ensuring the longevity of your business by having an open-minded approach to investing.
Assign accordingly
On paper, a portfolio is a collection of individual companies. But when you look at the bigger picture, it is actually a capital pool with everything combined.
Managing this can be challenging. One way to manage your different investments is to assign each project to an individual manager whilst someone higher up, such as the CEO, makes decisions based on the whole portfolio. This allows each project to get the best treatment whilst still playing a role in the larger picture.
Be conservative with your funds
Follow-on capital is the lifeblood of a continuing business, as it allows you to dive into a project as soon as you are ready. Having a clear reserve policy allows everyone, clients and employees alike, to be clear on how much money is invested into new projects and how much is used to support the existing ones.
Typically, companies keep 30% – 40% as reserve and use the remaining percentages to invest in new ventures.
Data is key
Whatever data you use, you must be sure to keep on top of the collection, management and analysis. GDPR laws must be followed strictly. You may want to appoint a Data Protection Officer to be a point of contact for this.
With every move in the venture capital business, there are risks and rewards. To keep everything above board, have a team of venture capital lawyers on hand to support your business and keep your best interests at heart.