It’s hands-down one of the top questions I hear from new angel investors.
How many startups should I be investing in?
And all too often…
I see one BIG misconception.
(I blame ultra-successful startups like Uber and Airbnb for it.)
And the ridiculous returns they brought to investors…
People seem to think that startup investing is all about unicorn hunting — searching for that one perfect deal that will make them millions.
They end up missing opportunities and put all their eggs in one basket.
Don’t get me wrong, I too want to be an early investor in the next Facebook!
But I believe there’s a much better strategy to increase your odds of hitting on the next mega-startup and some other winners along the way.
And I share this very strategy with you in my latest write-up.
Instead of swinging for home runs and striking out, you could be hitting singles and doubles and winning the game.
The truth is, long-term profits in startup investing come from throwing out a large net and investing in many companies.
Like with any other type of investment, a startup investment should be just one part of an entire portfolio. Spread the money around helps keep the chances of success high.
Angel investing is a numbers game. If you want to win you need a strategy, startup diversity, and a consistent deal-flow.
Consider Quantity And Quality
Statistics show that the number of deals is more important than the quality of any single deal.
Don’t take this the wrong way… due diligence and deal quality are still of utmost importance.
But trying to find a single “perfect” startups to ride through to riches isn’t the right approach.
According to the study, Startup Growth and Venture Returns by AngelList, investors increase their returns by broadly investing in every credible deal they find instead of only the best deals they find.
The overall market or index of startup opportunities beats the returns of 90% of startup investors, even experienced ones.
What does this mean?
For starters, it means the market of private companies — pre-IPO companies — is incredibly healthy. Also, it shows us that investing in more startups can increase our chances of success.
Why This Strategy Works
Now, you don’t need to go investing in hundreds of companies a year to turn a profit. There are methods you can use at a smaller scale, even for beginners.
We can start to base our investment strategy around two simple facts.
- Most startup investments will fail.
- Successful startup investments have huge returns.
Understanding this, the name of the game is making sure your wins can cover your losses.
Based on data from successful angel investors, the magic number of startups to make this work is 10. Let me break it down.
If you invest in 10 startups, on average, 4 of them will outright fail. No returns, your money is gone.
Now we have 6 left. What happens with those? Well, about 5 of them will break even or give you a small profit.
Finally, that remaining 1 startup will be a success. This means big returns. On average this win will be 10 to 30 times the initial investment, but it could be upwards of 100 times.
So we make 10 investments and only 1 is a win?
Yes, but here’s the thing — that one winner pays for all of your losses and nets you a hefty profit.
If you only invest in 1 or 2 startups, the chance that one of them will be a success is low. Most likely you will lose your investment and be discouraged and unable to reinvest.
This is why most serious angel investors will always have between 10 and 25 investments at any given time. You need to play the numbers game to win.
Managing Your Portfolio
Hopefully, by now you understand that angel investing isn’t about sitting around waiting for “The Big One”. The more solid companies you invest in, the greater your chances of success.
The exact number of startups you should invest in depends on your net worth, risk tolerance, and individual preference. Investing in more companies is better, but only to a limit. Your angel investing strategy needs to fit with the rest of your finances.
According to the Center for Venture Research, most Angel investors have between 5-25% of their net worth invested into startups. Depending on your net worth and deal-flow, this could be 5, 10, or 100 startups.
Tip: Investing smaller amounts of money into more startups is another way increase the chances of landing on a winning angel investment.
The best place to start is simply what you can manage. Start with 3 or 5 investments and work your way up. And a service like Angel Investing Inside can help you find deals to invest in.
However, once you get into the big-leagues — investing in 10-25 startups — you need to ensure you have a diverse group of startup investments.
Startup Investment Diversification
Keeping a diverse set of investments is as important in the angel investing world as anywhere else.
Quantity will give you some inherent diversification, but it is important to focus on other dimensions as well.
You can diversify your startup investments by investing in:
- Startup in different industries
- Startups in different stages of development
- Startups led by different types of entrepreneurs
- Startups taking on different types of risks
Through diversification, you mitigate risk. You don’t need to spend hours on due diligence if you have a good eye for talent and maintain a diverse portfolio of startups.
If you invested exclusively into the hospitality and tourism industries pre-COVID-19, your entire investment strategy would have collapsed.
But, if you had some investments in hospitality, some in medicine, some in education, you could have averted a crisis — maybe even turned a profit.
Likewise, by investing in some young startups and some mature, you will have an even spread of returns over time, some coming in 3 years, some 5, and some 10. You will be able to flip your profit back into investments steadily, rather than waiting for everything to happen at once.
By diversifying across many dimensions, you make up for your personal faults and bad habits, changes in the market, and open yourself up for a steady, profitable investing future.
How to Maintain Deal-Flow
Now that you understand the importance of quantity and diversification in startup investing, the last step is to figure out how to get enough good deals to keep the strategy afloat.
You can’t just throw your money around. It won’t matter how many startups you invest in if you don’t know the difference between a hit and a miss.
One of the most sure-fire ways to find high-potential deals is to boost your deal-flow through an angel investing network.