It’s time you face the reality of angel investing… for every 10 startups you invest in, 5 or 6 of them will be total failures.
That’s just the nature of the beast. This level of risk is what keeps the masses from pouring in.
Angel Investing is a numbers game. But if you play your cards right the one or two startups that win, can cover your losses and reward you massively.
To win with Angel Investing, you need to:
- Know how much cash you’re willing to invest (or lose)
- Understand angel investing is long-term investing
- Plot your investing strategy
- Stick to your strategy
- Find a source of high-quality startups
This won’t just come to you overnight–I’ve had my share of failures along the way.
But it doesn’t have to be that way for you. I’ve made it my mission to give investors just like you everything they need to start their journey off right.
Every day I hear angels talk about the big return they got from this or that startup. Sometimes I wonder to myself if their investing strategy even covered their losses.
The truth is, angel investing is one of the best ways to grow your wealth, but one big return isn’t going to cut it. This is a numbers game and it requires real strategy and access to a consistent flow of startups to invest in.
Angel Investment Return Potential
Let’s start with the basics. Angel investing, also known as seed funding, is a high-risk, high-reward type of investment. This type of asset class can give you the highest returns, but it can be difficult to find startups that will give it to you.
Let’s take a look at some data. This is the return on investment (ROI) of a few types of investments over the last twenty years:
All Venture Funds
As you can see, seed funds — the type of investment angels are interested in — yield the highest returns.
A successful angel investment will create huge returns, unlike any other type of security. This makes it uniquely fit for wealth creation as opposed to low-risk, low-return investments like index funds that are mainly for wealth preservation.
However, because the startups we invest in are in the early stages of business, it’s risky business. There is uncertainty about their future and scaling up will be difficult for them.
We share the latest startups to hit our radar inside our Angel Investing Insider service.
Angel Investing in Your Portfolio
Classic portfolio strategy recommends a diversity of risk levels. Low-risk investments are usually used to beat inflation, save for retirement, or for legacy purposes. High-risk investments are also essential.
Angel investing is the ultimate investment for filling this portion of your portfolio. It offers unparalleled potential for wealth creation.
Your portfolio should mostly consist of conservative investments with a nice chunk set aside for seed investing. This amount can range from 5% of your net worth up to 50% depending on your expertise and risk tolerance.
What Percent of My Net Worth Should Go to Angel Investing?
If you are comfortable with risk or want to grow your wealth quickly, you can devote more of your net worth to seed investing. Time for some more data.
The chart below shows the net worth allocation of 146 affluent angel investors taken from a Center for Venture Research survey. We can see how many angels devote how much of their net worth to seed funding.
|% of Net Worth for Angel Investments||1-4%||5-9%||10-14%||15-24%||25-50%||>50%|
|% of Angel Investors||7%||18%||25%||21%||19%||9%|
We can see that the most common allocation is between 10-14% of your net worth. Nearly half of all angels invest 10-24% of their net worth to seed funding.
This can give you an idea of what your portfolio should look like. Before you go off throwing 15% of your money into startups, you better understand how to manage your angel investments.
Managing Your Angel Investments
A diversity of asset classes and risk levels are essential for any portfolio. So too is the diversity of startups within your angel investment portfolio.
What the data shows us is that making one or two angel investments just won’t cut it. It’s important to invest in many startups to ensure your returns not only pay for your investments but make you a nice profit.
Planning for Startup Failures
Out of every ten startup investments you make, you can plan on about 4 of them failing. This actually isn’t a bad thing, it’s just a part of the game.
About 5 out of 10 will break even on your investment or give a small profit.
On average, only 1 out of 10 startups will provide significant ROI. This is usually 10 to 30 times your investment, but it can be upwards of 50 times and beyond. This startup will be enough to cover the losses and investments of all the other nine and still give you a hefty profit.
This is the pivotal idea that we base angel investing strategy around.
Serious angels who know how to play the numbers game should have no less than ten startups in their portfolio at any time. Somewhere between 10 and 25 startups, depending on your net worth allocation seems to be the sweet spot.
But you don’t have to have a ridiculous net worth to start your journey as an angel investor. You can start with as little as $100 in many cases.
Strategies for Angel Investors
There are a few basic things you need to understand going into seed investing. First of all, angels are patient investors. You can get the highest returns here, but it isn’t going to happen overnight. Returns usually occur within 5 years of investment. In some cases, you won’t see your money back for closer to 10.
Now, consider that only 1 in 10 startups will give ROI big enough for serious profits. None of us are smart enough to know exactly which startup will blow up, so we try to make sure that all of our startups could be the one.
This means that whenever you assess a startup, you need to make sure it has the potential to grow about 10 to 30 times over the next few years given its current traction. This is the only way you can invest in the long run.
Let’s get into the two most important parts of angel investing strategy: your number of startups and your startup selection.
Spray and Pray
The first strategy for angel investing success is the “spray and pray” method.
Your goal is strength in numbers. With spray and pray you should aim for smaller investments with as many startups as you can manage. You still need to assess each one and make sure it has the growth potential you need, but it is more of a fast and loose process.
Angel investment group 500 Startups uses “spray and pray” to great effect. They invest in practically any startup with potential. They invest in so many startups that they need to pull over 50 times ROI on 10% of their startups to make the system work.
This isn’t for everyone, and there is some real value in carefully selecting your startups.
The next big strategy focuses less on quantity and more on quality.
With an evaluation strategy, startups are rigorously inspected to meet certain criteria for investment. Fewer investments are made overall, with more money being committed to each startup. This strategy works better for angels in an angel investor network that can point you towards reliable startup deals you really want to sink your teeth into.
Angels in this camp will evaluate the startup’s financials, timing, and founders, among other things, to increase their chances of success.
This strategy can yield more successes than just 1 in 10, but takes more time, expertise, or assistance than spray and pray.
How You Can Boost Your Odds
The best strategy is a combination of spray and pray and evaluation strategy. This will give you quality startups without putting all your eggs in one basket.
One of the best ways to be successful, especially for those just starting out, is to join a community. As a part of a network, you can piggyback off of the expertise of others. I know that in my angel investing journey, learning from and collaborating with other angels has been essential.
A community can even supply you with the most important thing for angel investing, deal flow.
The Essentials for Playing the Numbers Game
I’ll boil it down to the core takeaways. This is everything you need to have a better strategy and build wealth faster with angel investing.
- Know your risk types – Use conservative investments for wealth preservation, and seed investments for wealth creation.
- Manage your portfolio – Successful angels have between 5% and 50% of their net worth in seed investments. Don’t be afraid to start on the low end and ramp up as you gain experience and confidence.
- Be diverse – Have a diversity of startups on your portfolio. They don’t need to be in different verticals or anything, just keep enough of them to cover your losses. Aim for 10 or more.
- Take it slow – Angel investments will take 5-10 years to give returns. Plan your course accordingly. If you are just starting out, you shouldn’t jump right in on 10 startups. You can work your way up, learning as you go.
- Be a part of a team – Getting into a community can teach you a lot. You can skip some of the mistakes and flops by listening to other angels. Many groups will offer startup deals to help your deal flow with good opportunities.
If starting a company is like riding a horse in a race, angel investing is like betting on the horses. It takes time, patience, and a lot of bets to hit a big one. Luckily, angel investing is far more consistent, strategic, and rewarding than gambling.
With the right information — and maybe a good community — you be a part of the angel investing world and start growing your wealth today.
For expert angel investing guidance, resources, and deal flow, you can join Angel Investing Insider. This isn’t just an industry-leading suite of educational courses, videos, and papers on angel investing, it’s also a community of people just like you.
Here, angel investors of all experience levels and walks of life can discuss, network, and advise one another, all under the guidance of millionaire, professional angels.
You even get hand-picked startup deals from the pros that you can invest in today for as little as $100.
No matter what your portfolio looks like or what strategy you choose, Angel Investing Insider can make the numbers game a whole lot simpler.