From Startup to Public Company, Fundamentals Matter: 3 More Strategies to Guide Your Investing (Nasdaq)

In part 1 of this series, I provided an overview of the 5 essential questions venture capital (VC) investors ask themselves when evaluating a potential investment opportunity. These inquiries revolve around the company’s team, market, intellectual property, business plan, and support ecosystem.

Today I will share 3 broader strategies that VCs use when investing. Like the 5 questions VCs ask when evaluating investments, these strategies are based on strong fundamentals and are good considerations for retail investors.

1. Portfolio and Investment strategy: Considering the portfolio and where to invest

Venture capital firms invest in a variety of companies in areas of opportunity that have been researched and validated through diligence. Forgepoint Capital, for example, invests in cybersecurity sectors such as secure software development, data security, governance, identity, infrastructure, and security operations. This approach increases the chances of good returns when the VC team has domain expertise and access to the right startups, as well as a network of external advisors and decision-makers to provide guidance and serve as early customers.

VCs have specific investment focuses, often specializing in a company’s maturity level or industry. The investment strategy guides the amount, type, and size of investments made by VC firms. Some firms take a “spray and pray” approach, investing smaller amounts in a larger number of companies with less due diligence. Others, like Forgepoint Capital, take a selective approach, investing larger amounts in fewer companies with more due diligence. Regardless of the approach, company-building VC firms aim to add real value and help companies grow and exit successfully. This is a key selling point to entrepreneurs looking for the right VC firm to grow their startup.

As a retail investor, consider the overall composition of your portfolio. You can diversify your portfolio by investing across asset classes (like stocks and bonds), geographic regions, and industries. Adjust the approach based on your risk tolerance — spreading out your investments (and investing in some lower-risk assets) can lower the downside risk of a big loss while maintaining much of the potential upside. Whether you invest in individual companies and bonds or mutual funds, you’ll need to decide where to deploy your capital and how much to allocate to each investment. Create an investing strategy that includes your preferred asset types, industries, and market capitalization sizes. Use this strategy to guide your investing decisions.

2. Exit strategy: Invest with the exit in mind

VC firms invest with the exit in mind. For VCs, exits occur when a startup is mature enough to be incorporated into a larger company or go public. This can mean mergers and acquisitions (M&A) or initial public offerings (IPOs). For example, in the cybersecurity sector, M&A is more common than IPOs as larger players and public companies acquire startup technologies to stay relevant, compete, and open up new markets. I believe this will be especially true heading into the rest of 2023 and early 2024, as valuations normalize and the market rebounds.

In any case, VCs always model out their projected investments and have an exit plan in mind, even if the timing and final outcome might change as the company grows and evolves. Our goal as VCs is to partner with entrepreneurs and build strong companies through their phases of growth until they are ready for an exit.

As a retail investor, know how long you intend to hold your investments. Your strategy could be to buy and hold bonds, stocks, and index funds indefinitely or to sell after a certain timeframe or price point (or to realize your earnings when a bond matures). For example, longer time horizons generally reduce risk when investing in individual companies — you could invest over a longer period in companies with long-term growth potential to maximize your odds of success. No matter what you choose, create an exit strategy so you know when to sell or continue holding an investment.

3. Team and Resource strategy: A trusted team and resource library to inform your decisions

VC firms build a trusted team of business leaders with diverse perspectives to evaluate investments and support funded companies. For example, in addition to our 90+ member Advisory Council of industry leaders, experts, and innovators who help my team find and support the next great cybersecurity companies, Forgepoint Capital has a broader community of executives and practitioners we meet with regularly for deep insights on frontline threats and problems. This strong, collaborative network augments our research and analysis beyond what might be found in publicly and privately available reports.

As a retail investor, the resources and people you learn from are critical. Make sure you use reliable resources and build your own trusted inner circle to help you make informed decisions. You might read publications like Nasdaq.com, The Motley Fool, or Barron’s to stay up to date with market trends. For instance, when making direct investments in your favorite stocks you could use these resources to research how companies approach the classic “build, buy, partner” framework. Do they continue to innovate, and are they making smart acquisitions?

This is where market research, trustworthy publications, and the latest industry news will all help. You can also analyze emerging company and industry information by following quarterly earnings calls and industry-specific publications. It’s often helpful to work with an investment advisor or participate in an investing group to share insights and approaches.

Fundamental strategies to guide your investing decisions.

As investors, we rely on three key strategies to guide our decisions: a balanced approach to investing and portfolio management, a clear exit strategy, and access to knowledgeable people and resources to validate and refine our thinking. Throughout this series, I’ve emphasized the importance of understanding both business and investing fundamentals. While market dynamics may shift and strategies may evolve, these principles remain critical for long-term success. Whether you’re a venture capitalist or a retail investor, staying grounded in the basics is key to achieving your goals.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision.

***This blog was originally posted on Nasdaq.com. You can read it here.***