If you wanted the cold honest truth about what’s really like to invest in a startup…
I’d share my four simple rules to startup investing.
Which I’m about to do shortly…
But first… I want to give you something even more powerful.
I’m talking about my latest ebook, the Startup Investor’s Playbook.
Learn how to set some basic guard rails and begin investing in startups with confidence…
If you want to get a small taste of the strategies, techniques, and tips I share in my ebook, the 4 rules I mentioned earlier is the place to start.
And I’ve laid them out for you here in this short guide.
Angel investing can be incredibly lucrative, and even addicting. But for new angel investors, questions like, “How much should I invest in this deal?” and “What percentage of my portfolio should be angel investments?” can be daunting.
These are 4 basic rules any new angel investor should keep in mind. But don’t just stop here–you can get my latest strategies for startup investing here.
1. Your budget should be 10-20% of your portfolio.
While professional angel investors might invest as much of 50% of their portfolio in angel investments, most savvy investors who consider angel investing just one part of their larger investment strategy commit about 10-20% of their portfolio in angel deals.
Of course, this depends on your risk tolerance and the size of your portfolio. An individual with a larger net worth can afford to commit more money to angel deals, which are by definition higher risk investments. If you have a higher tolerance for risk or more time to commit to your personal due diligence, that might also drive this percentage upwards.
There are also certain restrictions as to how much you can invest in equity crowdfunding (Reg CF) specifically. This maybe 5-10% of your net worth, depending on your income. This bulletin from the SEC explains more.
Let’s do some quick math: If you had $400,000 in assets, then you would invest roughly $40,000-$50,000 in angel deals. Since you are looking to do at least ten angel deals, that money will go quickly. Ultimately, you would invest about $4,000-5,000 per deal.
2. Aim for about 10 deals a year
This number might vary slightly depending on your budget, but it’s useful to determine your average investment size.
Some of the big-time professional angels recommend 50+ a year. That really only holds true for people with eight digits in their bank account (before the decimal point).
The key point here is that you are investing a smaller amount in many deals. We’d rather see $1,000 invested in 10 promising companies than $10,000 invested in one. For that matter, $1,000 invested in 10 startups will probably return more than $10,000 invested in 3 startups.
3. Invest roughly the same amount in each deal.
While we know that some deals require a minimum buy-in, we try to invest around the same amount in each deal. This philosophy is based on the fact that we just don’t know which startup is going to pop.
We want to be wildly enthusiastic about every deal we invest in. Every piece of our due diligence needs to be a green light if that company has any chance at success. Even still, most will fail.
If you invest roughly the same in every deal, it doesn’t matter which one pops—you’re going to come out on top and more than cover your losses.
In angel investing, there is no truer statement than “Don’t put all your eggs in one basket.”
4. Choose your “flock.”
We have borrowed this term from Jerry Neumann, founder of Neu Ventures Capital. The idea is simple: you have domain knowledge or a passion within a particular niche or industry, so stick with it.
The more you concentrate on that area of expertise, the more likely you will be to pick winners in that area. You will build your connections and domain knowledge much more rapidly this way. And, ideally, the money you’re investing in that niche is going to support the growth of the market over all.
While there are many more variables besides “Do I have the money?” and “Do I need more deals?”, these are the foundations to a winning angel investing strategy to get you going.
Want to learn more about angel investing? Download your FREE copy of my new ebook, Startup Investor’s Playbook.