There are a few key qualities shared by every great angel investor.
A good intuition and even temperament will take you pretty far in this game. It doesn’t hurt to have a passion for entrepreneurship and innovation, either.
But patience is absolutely critical. Angel investing is not for those who can’t stand the idea of leaving their investments tied up for a few years.
Those folks are better suited to the stock market, where they at least have the option to take their money back at any time.
The stock market is safe in that regard. But people who play it too safe miss out on the really big rewards. They pocket a little extra dough each year, while those who take risks get rich.
Seriously. On a good year, a stock portfolio returns around 10 percent. A well-managed angel portfolio? More like 25 or 30.
Plus, in my opinion, the risks are overblown.
Sure, you can lose all your money as an angel investor, especially if you throw your entire weight behind one startup. In fact, if that’s your only strategy, you probably will lose everything.
But that’s not how my strategy works. For starters, I only invest in companies that follow my 1,000X Formula. It’s a super-simple algorithm I developed to help me figure out which startups have the potential to multiply my investment 1,000 times over. It’s done wonders for my batting average – and I think it’ll do the same for you. Just click here to learn more.
The 1,000X Formula is one of the most important tools I use to make investing decisions, but there’s one other component to my strategy that is just as crucial: mitigating risk by investing smaller amounts of capital into several different startups simultaneously – ideally, at least ten.
Some will go under, some will break even… and a few will shoot skyward, raising millions of dollars from venture capital funds or selling the business for a fat profit.
Here’s a breakdown of the possible outcomes for startups and their angel investors:
Yes, it looks bad – around three quarters of likely outcomes will land you in the red.
Here’s the thing, though…
Say that you invest $1,000 into a startup, and you get the worst possible outcome. The startup fizzles out, falls off the radar, and loses everyone’s money.
You’re out a thousand bucks. That stinks. But it’s only one small piece of your diverse portfolio of angel investments.
Realistically, you’ll probably lose quite a few investments. But consider this: one in five startups ends up getting acquired by a larger company. Those sales can range from a few million dollars to several billion.
Take Facebook’s recent acquisition of CTRL-Labs, for example. That tiny startup sold for an eye-popping $1 billion after just a few years in business.
On average, though, acquisition deals fall between $50 million and $200 million, yielding anywhere from 2x to 100x returns to investors.
That’s more than enough to ease the pain of the five or six investments that dropped to zero, the two that broke even, and the one “walking dead” startup that should be long gone but still manages to burn money.
Acquisitions used to be less common. Twenty years ago, successful startups would raise five or six rounds of funding, then go public.
But that process takes time. Funny enough, the average time from founding to IPO (10 years) is longer than the average marriage lasts in the U.S. (8.2 years).
Today, the number of companies that go public is less than half of what it was in the 90s. That puts the odds of any startup making it to an IPO under one percent.
Mergers and acquisitions – in which huge companies absorb smaller ones for their products, assets, or employees – make up the bulk of exits now.
That’s good news for angel investors. Instead of waiting 10 years for an outcome, most angel portfolios start seeing gains after just three and a half.
Still, three and a half years isn’t exactly a fling. Remember that your investment is illiquid – completely untouchable – from the moment you pay up until the company makes an exit.
My advice? Treat your angel investments like long-term relationships to get the most out of your portfolio. (For a crash course on how the funding timeline works, click here.)
Until next time,
Neil Patel
A good intuition and even temperament will take you pretty far in this game. It doesn’t hurt to have a passion for entrepreneurship and innovation, either.
But patience is absolutely critical. Angel investing is not for those who can’t stand the idea of leaving their investments tied up for a few years.
Those folks are better suited to the stock market, where they at least have the option to take their money back at any time.
The stock market is safe in that regard. But people who play it too safe miss out on the really big rewards. They pocket a little extra dough each year, while those who take risks get rich.
Seriously. On a good year, a stock portfolio returns around 10 percent. A well-managed angel portfolio? More like 25 or 30.
Plus, in my opinion, the risks are overblown.
Sure, you can lose all your money as an angel investor, especially if you throw your entire weight behind one startup. In fact, if that’s your only strategy, you probably will lose everything.
But that’s not how my strategy works. For starters, I only invest in companies that follow my 1,000X Formula. It’s a super-simple algorithm I developed to help me figure out which startups have the potential to multiply my investment 1,000 times over. It’s done wonders for my batting average – and I think it’ll do the same for you. Just click here to learn more.
The 1,000X Formula is one of the most important tools I use to make investing decisions, but there’s one other component to my strategy that is just as crucial: mitigating risk by investing smaller amounts of capital into several different startups simultaneously – ideally, at least ten.
Some will go under, some will break even… and a few will shoot skyward, raising millions of dollars from venture capital funds or selling the business for a fat profit.
Here’s a breakdown of the possible outcomes for startups and their angel investors:
Yes, it looks bad – around three quarters of likely outcomes will land you in the red.
Here’s the thing, though…
Say that you invest $1,000 into a startup, and you get the worst possible outcome. The startup fizzles out, falls off the radar, and loses everyone’s money.
You’re out a thousand bucks. That stinks. But it’s only one small piece of your diverse portfolio of angel investments.
Realistically, you’ll probably lose quite a few investments. But consider this: one in five startups ends up getting acquired by a larger company. Those sales can range from a few million dollars to several billion.
Take Facebook’s recent acquisition of CTRL-Labs, for example. That tiny startup sold for an eye-popping $1 billion after just a few years in business.
On average, though, acquisition deals fall between $50 million and $200 million, yielding anywhere from 2x to 100x returns to investors.
That’s more than enough to ease the pain of the five or six investments that dropped to zero, the two that broke even, and the one “walking dead” startup that should be long gone but still manages to burn money.
Acquisitions used to be less common. Twenty years ago, successful startups would raise five or six rounds of funding, then go public.
But that process takes time. Funny enough, the average time from founding to IPO (10 years) is longer than the average marriage lasts in the U.S. (8.2 years).
Today, the number of companies that go public is less than half of what it was in the 90s. That puts the odds of any startup making it to an IPO under one percent.
Mergers and acquisitions – in which huge companies absorb smaller ones for their products, assets, or employees – make up the bulk of exits now.
That’s good news for angel investors. Instead of waiting 10 years for an outcome, most angel portfolios start seeing gains after just three and a half.
Still, three and a half years isn’t exactly a fling. Remember that your investment is illiquid – completely untouchable – from the moment you pay up until the company makes an exit.
My advice? Treat your angel investments like long-term relationships to get the most out of your portfolio. (For a crash course on how the funding timeline works, click here.)
Until next time,
Neil Patel
Follow @angelsandentrepreneurs
