Since last year, a new opportunity to create amazing amounts of wealth has been available to everyday investors. The passage of Regulation CF (crowdfunding) last May gave everyone the right to invest in equity crowdfunding.

In short, equity crowdfunding gives you the ability to buy shares of the next Facebook or Snapchat well before they go public through an initial public offering (IPO). This means that you can experience first-hand the fortune-creating growth that these companies undergo in their early stages.

Since last October, my team and I at Pre-IPO Millionaire have been analyzing the newest startups to find companies with industry-disrupting potential — then passing those picks on to our subscribers. This involves an attempt to forecast the future success of a company from its earliest days, which is no easy task.

But while no two startups are alike, there are common themes that lead to bad pre-IPO investments. In my ten years of working with venture capital and angel investors, I’ve seen three problems resurface time and again that cause investors to invest in bad companies that sink portfolio returns.

These failings in startup investing are the reason more than half of angel investments return less than the original investment or nothing at all.

They’re the same problems that I want to teach my readers to recognize and avoid when choosing their investments. Understanding them will not only help you pick individual investments but also put together a list of best practices to guide your entire portfolio to higher returns.

Not Doing Enough Due Diligence
Not spending the time to dig deep into financials and investment potential accounted for the biggest gap in angel investor portfolios, according to a survey by investment firm Fifth Era.

#-ad_banner-#The survey of 250 investors found that angels spending at least 40 hours in research and analysis on any given deal achieved an average 5.9-times multiple on their original investment. Those spending less time analyzing potential deals saw a return multiple of just 1.1-times on average.

That time commitment to due diligence is a major hurdle for many investors — even wealthy angels that can rely on teams within a local investment group. If you consider that just one-in-ten deals brought to an angel investor ever receives funding, the total time spent analyzing startups can be a part-time job by itself.

Consider that an investor may have to spend more than 10 hours analyzing any startup offer and then 40+ hours on the two or three that look promising. If an investor funds one of every ten potential deals and hopes to make at least five total investments each year, that could amount to nearly 1,000 hours of analysis per year.

And that’s what makes Pre-IPO Millionaire so valuable to investors — the ability to get that professional-level due diligence delivered to your inbox every month. I research multiple startups before choosing one to highlight each month, and then I put together a full research report on the best deal.

Investing In Unfamiliar Industries
Strong industry experience isn’t just something to look for in startup management but it is a strong factor in predicting returns for startup investors. Angels investing in areas of direct industry experience reported return multiples twice as high as those investing outside their expertise in the Fifth Era survey.

This is intuitive given the importance of market research into startup investing. Years of professional experience in an industry will give you an idea of profitability, competition and challenges for companies in the space. It will not only mean less time spent researching the market but also unique insight into it.

There are two approaches to solving this problem of industry experience in pre-IPO investing:

—  You could look to invest only in startups within your industry or within closely-related industries. This will make it easier to research deals, and your returns will likely be higher but it will also severely limit the number of deals in which you can invest.

—  You could also team up with a few other investors, each with expertise in different industries. Group members don’t necessarily need years of experience in an industry but only the commitment to focus on that industry and do as much research as possible to become an expert.

Following the Pre-IPO Millionaire newsletter is like following that investment group approach. You get the benefit of research across a range of industries, research I put together from years as a venture capital analyst and through interviews with industry insiders.

A hybrid approach to investing would be to use information from the newsletter to invest in companies outside your industry of expertise while looking for a few other deals within your industry to fill out your portfolio.

Failing To Diversify
Lack of portfolio diversification is one of the biggest hurdles for angel investors. Angel groups and venture capital firms use their deep experience in a specific industry to analyze and find those startups with the highest likelihood of success. They rarely invest outside this industry focus and it often leads to skewed returns when the industry is hit by macro-level factors outside a company’s control.

Angel groups are not able to diversify their investments as you might within your stock portfolio by investing across different sectors and industries.

The problem with this need for diversification in a startup portfolio is that it contradicts the benefit to industry experience in investments. The obvious solution would be to expand membership in an angel group to investors with experience in other industries, but this almost never happens.

When asked about the lack of diversification in investments, angel investors gave the following three reasons:

– Investing too much in prior deals limited the amount they could invest in subsequent startups
– Lack of time to fully research multiple industries and investments
– Lack of startup investments within their region

Diversification within your pre-IPO portfolio is just as important as it is in your portfolio of stocks. It’s the only way you will be able to smooth returns when macro-level factors hit specific industries. It will also help to protect your overall financial health if an industry-specific risk puts your own career in jeopardy, threatening your income and the investments you’ve made in that industry.

I’ve already discussed the benefit of using an investor group or service like Pre-IPO Millionaire to extend your investment knowledge into other industries. I closely follow ten equity crowdfunding platforms, scanning the websites each month for new deals to give you a better range of potential investments.

My newsletter pulls no punches interviewing management, evaluating the market and finding the deals with the highest potential every month. Never have regular investors had access to these kinds of investments and this level of professional analysis…Until now. It’s like having a venture capital firm working for you!

To get my full analysis of the most promising acquisition targets and pre-IPO companies on the rise today, click here.