Diversification refers to mitigating risk across an investment portfolio by holding a range of assets and securities, thereby reducing the impact of a single negative event across the entire portfolio. By diversifying, the investor’s goal is to reduce the impact of asset-specific risks.
Investing in startups offers the benefit of diversification as they have little correlation with many other asset classes. Thus, investments in startups can reduce the risk of a portfolio comprised of more typical asset classes, while providing for potentially higher returns.
Additionally, diversification within an investor’s startup portfolio is very important due to their high failure rate. Similar to overall portfolio diversification, if an investor has multiple startup holdings, if one company fails, other companies have the potential to make up for the loss.