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Managing portfolio maturity: tips for successful outcomes

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Some of the impact startups in my portfolio have reached maturity, i.e., are now offering more liquidity opportunities, while their growth has slowed down. It’s a tough spot to be in, but given my views on the prospects of the global economy and current startup investment opportunities, I’ve reached an important crossroads that requires some divestment decisions.

So, I’ve made the hard call to reinvest the proceeds from my impact investment portfolio into new opportunities, rather than just continue adding more money to the investment pool. It wasn’t an easy decision, but I believe it’s the best one to maximize returns and continue to make a positive impact.

I previously reflected on this post about how to exit an impact investment. I shared therein a framework for aligning financial returns with social and environmental impact outcomes. The framework consists of five steps: identifying and measuring impact outcomes, aligning incentives, managing risk, optimizing financial returns, and storytelling.

In this post, I reflect on the pros and cons of rebalancing the investments in my portfolio and craft a set of rules to guide my sales decision-making process.

A “breathing” portfolio

In terms of portfolio management, I believe that we should strive to identify strategies that aim to create resilient, dynamic, and adaptable investment portfolios that can increase the chances to withstand the fluctuations and uncertainties of the markets.

Rebalancing the investments in a portfolio has its pros and cons. Here are some potential advantages and disadvantages to consider:

Pros of balancing a portfolio of startups include reducing risk, increasing diversification, and providing exposure to multiple industries, sectors, and geographic regions, potentially leading to better overall returns if one sector, industry, or geography outperforms another.

Cons of balancing a portfolio of startups include potentially missing out on high-growth opportunities and diluting potential returns. A mistake may be made by exiting a winner too early, i.e., a high-growth startup with the potential for higher returns. Additionally, if the performance of the new rebalanced investments does not exceed the performance of the divested startups, the returns on the portfolio as a whole may be diluted.

My current approach

I have intentionally focused my investment portfolio on equity in impact startups and equity-like investments such as SAFEs and convertible notes. While this approach may be riskier, it aligns with my investment thesis and decision-making process of maximizing impact and being comfortable with the potential full loss of the investment.

To mitigate risks and create a more diverse portfolio, I employ a strategy of “fragmented investments” by selecting opportunities that vary in risk levels (e.g., different phases in the startup cycle), geographic regions, industries, and sectors. This allows me to balance my investments and minimize exposure to any single point of failure.

Sale decision-making process

Establishing a set of rules or guidelines for the sales decision-making process is important to ensure that rebalancing decisions are based on objective criteria rather than emotion or short-term performance.

I currently use the following criteria:

To select which startups to consider for divestment:

To decide among the candidates for divestment which one(s) to sell:

Final thoughts

To manage an investment portfolio effectively, it’s important to consider the advantages and drawbacks of rebalancing investments and exiting startups. Balancing your portfolio can reduce risk and diversify returns, but going too far might mean you miss out on high-growth opportunities. Making a set of rules to guide your sales decisions will make investing easier to manage and reduce emotional biases. When deciding to sell, keep your investment goals, risk tolerance, and market conditions in mind. Following a disciplined plan should facilitate sticking to our long-term goals.

“It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy.

Seth Klarman
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