VCs don't pick winners - they build portfolios that survive losers.The average VC fund invests in 20-30 companies knowing that most will fail. Their returns come from the 2-3 home runs that return the entire fund.This guide teaches you how to apply the same portfolio approach to pre-IPO investing. Position sizing, diversification, and risk management that maximize your chances of success. If you're still learning the basics, start with our beginner's guide to pre-IPO investing.
Step 1: Determine Your AllocationPre-IPO should be a portion of your overall portfolio, not all of it.Recommended Allocation by Risk ToleranceConservative: 5-10% of investable assetsModerate: 10-20% of investable assetsAggressive: 20-30% of investable assetsKey ConsiderationsLiquidity needs: Pre-IPO investments are illiquid for 5-10 years. Don't invest money you might need.Risk capacity: These investments can go to zero. Only invest what you can afford to lose entirely.Time horizon: If you need returns in The "Sleep Test"If your pre-IPO allocation dropped 50% tomorrow, could you sleep? If not, reduce your allocation until you can. Panic selling illiquid assets locks in losses. Smart money takes a more disciplined approach, as we explain in the pre-IPO playbook.
Step 2: Diversify Across CategoriesDon't put all eggs in one basket - or one sector.Sector DiversificationSpread investments across different industries:Technology: AI, SaaS, fintechHealthcare: Biotech, digital healthConsumer: E-commerce, DTC brandsClimate: Clean energy, sustainabilityCrypto/Web3: Infrastructure, access platformsStage DiversificationMix early and later-stage investments:Early stage (Seed/A): Higher risk, higher potential return (100x+ possible, 70%+ failure rate)Growth stage (B/C): Moderate risk, moderate return (10-30x possible, 40-50% failure rate)Late stage (D+/Pre-IPO): Lower risk, lower return (2-5x typical, 20-30% failure rate)Recommended MixFor most investors: 20% early stage, 50% growth stage, 30% late stage. Adjust based on risk tolerance.
Step 3: Position SizingHow much in each deal matters as much as which deals you pick.The Power Law RealityIn venture, returns follow a power law: a few massive winners drive all returns. This means:You need enough positions to catch the winnersYou can't over-concentrate in potential losersWinners need room to compoundPosition Sizing RulesMaximum single position: 10-15% of pre-IPO allocation at costMinimum positions: 8-10 deals for meaningful diversificationEqual weighting vs conviction: Start equal, adjust based on conviction (but never exceed max)Rebalancing WinnersIf one position becomes >25% of your portfolio from appreciation, consider trimming. Power law works both ways - don't let one bad reversal sink you.Example: $100K pre-IPO allocation → 10 positions at $10K each → no single position can devastate the portfolio.
Step 4: Time Your EntriesDon't invest everything at once. Time diversification reduces entry risk.Dollar-Cost Averaging for Private MarketsInstead of investing your full allocation immediately:Year 1: Deploy 30% of allocation across 3-4 dealsYear 2: Deploy 30% across 3-4 different dealsYear 3: Deploy remaining 40% across 3-4 dealsWhy This MattersMarkets cycle - 2021 valuations were very different from 2023Your evaluation skills improve with experienceSpreading entries reduces impact of bad timingVintage Year DiversificationProfessional LPs invest across multiple VC fund "vintage years" for this reason. Apply the same logic to direct investments.
Step 5: Plan for IlliquidityPre-IPO investments lock up capital for years. Plan accordingly.Expected Hold PeriodsEarly stage: 7-12 years to exitGrowth stage: 4-7 years to exitLate stage: 2-5 years to exitLiquidity PlanningNever invest emergency fundsDon't invest money needed for major purchases (house, car, education)Maintain 6-12 months expenses in liquid assets outside pre-IPO allocationSecondary MarketsSome platforms allow selling pre-IPO positions early, but expect discounts to current valuations. Plan to hold to exit, treat secondary as emergency only.Tax PlanningPre-IPO gains can be significant. Work with a tax advisor on QSBS exemptions, long-term capital gains timing, and estimated tax payments.
Common Mistakes to Avoid1. Over-Concentration"I really believe in this one" leads to 50%+ in a single deal. Don't. Even the best VCs are wrong most of the time.2. Chasing Hot DealsFOMO-driven investing at peak valuations. The "hottest" deals are often the worst risk-adjusted opportunities.3. Ignoring Total ExposurePre-IPO + crypto + speculative stocks = too much risk concentration. Consider your entire financial picture.4. No Exit PlanningKnow your target returns and when you'll sell. "I'll hold forever" leads to giving back gains.5. Skipping Small DealsMinimums exist for a reason, but don't over-allocate just to meet minimums. Better to miss a deal than over-concentrate.
Sample PortfoliosConservative ($50K Allocation)5 positions at $10K eachFocus on late-stage (D+ rounds)Well-known companies near IPOExpected return: 2-4x in 3-5 yearsModerate ($100K Allocation)10 positions at $10K eachMix of growth and late-stage2-3 early stage for upsideExpected return: 3-5x in 5-7 yearsAggressive ($250K Allocation)15-20 positions at $12-15K eachMore early stage exposureSector bets on emerging themesExpected return: 4-8x in 7-10 years (with higher variance)IPO Genie makes portfolio building easier with curated deal flow and lower minimums, allowing diversification even with smaller allocations.
Frequently Asked QuestionsQ: How many deals do I need for diversification?Research suggests 15-20 deals provides meaningful diversification in venture. With fewer deals, you're relying more on luck than portfolio construction. 8-10 is minimum for basic diversification.Q: Should I invest in follow-on rounds?If you have pro-rata rights and the company is performing well, follow-ons can be smart. But don't over-concentrate - same position sizing rules apply.Q: What about recycling returns?When investments exit, you can reinvest returns into new deals. This compounds your portfolio over time. Many VCs target 1.5-2x recycling of initial capital.Q: How do I track my portfolio?Spreadsheet at minimum, tracking: investment date, amount, company, valuation at entry, current estimated valuation, ownership percentage. Update quarterly based on funding rounds and news.Q: What's a realistic return expectation?Good pre-IPO portfolios target 3-4x net return over 7-10 years. This accounts for failures (50%+ of investments returning less than invested) offset by winners (5-20x+ returns).
