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As an angel investor how many investments should you be looking to make?
You’ve probably heard the statistics about venture capital where ⅓ of investments fail, ⅓ return their capital and the last ⅓ have to do all the work for a positive IRR for LPs.
You’ve probably heard the statistics about venture capital where ⅓ of investments fail, ⅓ return their capital and the last ⅓ have to do all the work for a positive IRR for LPs.
So for a VC fund making 20 investments they are relying on 6-7 investments.
In angel investing you are the LP
and you'll likely have less resources and experience than the VC fund.
There are a few concepts that will help guide your strategy, specifically:
In angel investing you are the LP
and you'll likely have less resources and experience than the VC fund. There are a few concepts that will help guide your strategy, specifically:
1/ angel portfolio returns data
2/ maximising shots on goal
3/ information asymmetry
2/ maximising shots on goal
3/ information asymmetry
1/ Fortunately, @AngelList conducted a statistical study of 10,000 angel portfolios on their platform - https://angel.co/blog/how-portfolio-size-affects-early-stage-venture-returns
The most interesting observation is IRR increases with the number of investments.
Unless you have an exceptional network and ability to pick those winners (like all VC funds claim) then you are better off with significant diversification.
Unless you have an exceptional network and ability to pick those winners (like all VC funds claim) then you are better off with significant diversification.
2/ Logically an investor would like to place all their money in the one company that makes the highest return.
Unless you are a time traveler from the future or have the luck of a Powerball winner you can forget that idea.
No one knows which they are at the early stages!
Unless you are a time traveler from the future or have the luck of a Powerball winner you can forget that idea.
No one knows which they are at the early stages!
Even survival is far from certain early in a company’s life.
So many factors can affect a successful outcome and many are outside the control of the company.
Even unicorns can fail.
Simply taking more shots on goal (
investments) increases your chances of 10-100x
So many factors can affect a successful outcome and many are outside the control of the company.
Even unicorns can fail.
Simply taking more shots on goal (
investments) increases your chances of 10-100x
3/ Exposure to a wide range of opportunities, and seeing the success/failures they experience, helps you build up a much better picture of what is happening in the market.
More primary data and information allows you to iterate your market model and find better opportunities.
More primary data and information allows you to iterate your market model and find better opportunities.
This is the information asymmetry that professional investors enjoy to their advantage across public and private markets.
Relying on publicly available information, or worse, marketing and promotional material about a company or market, seldom creates insight.
Relying on publicly available information, or worse, marketing and promotional material about a company or market, seldom creates insight.
Many new angel investors have a very concentrated portfolio. There are many reasons for this:
* an eagerness to get started
* belief they can add more value to a small number of investments
* belief they have superior knowledge to others in the market.
* an eagerness to get started
* belief they can add more value to a small number of investments
* belief they have superior knowledge to others in the market.
Early stage companies are more likely to fail and fail quickly.
Without diversification you are likely to give up quickly.
According to Cambridge Associates data early stage investing provides better returns and is uncorrelated with public market returns.
Shame to miss out!
Without diversification you are likely to give up quickly.
According to Cambridge Associates data early stage investing provides better returns and is uncorrelated with public market returns.
Shame to miss out!
