Angel investing can be a rush.
There’s nothing quite like finding a startup that really piques your interest. At first, it just seems like a particularly clever idea. As you do your due diligence, however, you start to embrace the founders’ vision…
Suddenly, you’re not just looking at an investment opportunity. You’re standing on the doorstep of a company that is going to change the world.
You’ve stumbled upon the next Tesla or Facebook. You’re on the bleeding edge of a revolution.
Better yet, it’s gonna make you a whole lotta money.
The market is there. The product is there. There are traction and vision. This baby is going to turn your little chunk of change into billions. And this deal is just sitting there, waiting for you to invest. You can’t pull up your banking info fast enough.
And that’s when it happens.
You just made the No. 1 mistake of rookie angels.
You invested too much. In fact, you invested all your angel capital into your first deal. Now you have to sit on your hands until… And it just flopped.
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.
Never fear. We’re here to explain our strategy for allocating our investment capital, The Four Tenets of Investment Strategy:
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 about 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 about 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.
The one time that choosing your flock doesn’t matter as much? When you are investing with a trusted partner like The Boardroom.
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!