Angel investing, like making movies or playing baseball, is what’s known as a “hits business.”
In other words, the hits – the moonshot startups that grow exponentially – are the ones that will make you the bulk of your returns.
You’ll see plenty of 2x and 3x returns along the way… but every once in a while, you can score an absolute home run that scores you 10, 50, or 100 times your investment.
Naturally, to win in a “hits game,” you need to invest in a number of deals. Too few, and you may never see one of those legendary homers.
So where’s the sweet spot?
There’s no exact right answer, but my rule of thumb is to be in at least 10 different angel investments.
Just like with any investment class, diversification is key.
Given the statistics, it just makes sense. A ten-investment portfolio stands a very good chance of making returns of 20 percent yearly, or more.
As for how much money you should invest in each startup…
It all comes down to what you’re comfortable with. Just like in any investment class, you should always consider the possibility that you’ll lose some money – even if that outcome is extremely unlikely. So, before you jump in, ask yourself the following questions:
- What portion of my assets am I comfortable setting aside, knowing that I may not regain access to them for several years?
- What amount of money would be annoying or painful to lose?
Your answers to these questions should give you a better idea of your personal investing limit. And it is a personal decision – it’s your hard-earned money, after all.
Think about it this way. Two people, both with $200,000 in their bank accounts, won’t necessarily treat their assets the same way.
Maybe one of them makes a high annual salary, while the other is working with the remainder of his or her retirement savings. Obviously, that second investor might (wisely) choose to be a little more conservative with his or her money.
In all, most angels will set aside somewhere between 5 and 10 percent of their net worth for angel investing, though some experienced players invest much more. It’s ultimately your decision.
In a given year, you may choose to spread your maximum annual investment amount across ten or more funding opportunities.
Investing smaller amounts into a diverse portfolio is always better than taking one huge leap with your entire budget.
I say this all the time: owning a tiny piece of a huge company is infinitely better than owning a huge piece of nothing.
And if you bet whole wallet on one pony, ending up with nothing at all is a possibility.
So, take my advice:
First, figure out how much you’re legally allowed to invest.
Take that number and whittle it down to what you’re comfortable investing.
Finally, you should divvy up that chunk of change into enough portions to invest in ten or more startups – what I like to call the “magic number.”
Until next time,