50 $5k Bets or 5 $50k Bets

Recently I was talking to a successful entrepreneur that wants to start doing some angel investing. As part of this initiative, he wanted to initially invest roughly $125,000 per year for two years ($250k total). He said he was looking at a variety of strategies and debating between two approaches:

  • 50 $5k Bets – Invest $5,000 in 25 startups per year with the idea that it’s incredibly hard to pick the winners, so having a diversified portfolio increases the chances of finding a couple that do well, and then doubling down on the winners. With so many investments, at such a modest amount, there wouldn’t be much time to give individual attention, but in a short amount of time it’d be clear which ones are doing well, and which ones aren’t.
  • 5 $50k Bets – Invest $50,000 in 2-3 startups per year with the idea that he’d pick ones where he can add value based on the industry, domain expertise, and/or connections. The portfolio wouldn’t be diverse, but he’d have a larger stake in a few select companies and hopefully add value beyond just the money.

After hearing these two strategies, I asked him how much he was reserving for follow-on rounds to participate pro-rata (if any) and his general follow-on strategy. His response was that he’s planning on the same $125,000 per year for follow-on rounds, so likely 1-2x the initial investments, depending on how many make it and actually raise more money. Now, this differs from one recommendation I’ve heard to save 3x the initial angel investment for follow-on rounds but it’s still in the ballpark, especially if he’s not very selective.

Regardless of what he chooses to do, what’s important is that he’s working on a strategy and getting into the arena.

What else? What are your thoughts on the two strategies and which one do you like better?

3 thoughts on “50 $5k Bets or 5 $50k Bets

  1. My strategy is to do both… Half my angel money goes into startups in which I have large conviction and want to help them. The other half are much smaller investments that cast a wider net. So I would do 25 at $5k each and 5 at $25k each. Since some of them are $5k keep an eye on AngelList Syndicates.

  2. I would prefer to put it all into one or two and have a heavy hand in advising the business and even on the board. If you go too small, you are spread too thin. What he is working with is too small to have any sort meanigful outcome, especially I’m the ATL unless he is super connected with the right deals and opportunities. Personally, I would tell him to invest the money in himself. Take a trip and then start a company as his best investment will be in himself and if he doesn’t want to do this is to invest in a fund such as the BIP Fund or others I’m Atlanta and let the experts do the picking and management as this is a very difficult business to do on your own, plus with a long term illiquid time horizon.

  3. Thanks for teeing this one up. As an angel investor, one has very little control over the outcome of a small passive investment in an unprofitable business. As Dave Williams suggests, it’s best to admit this and either bet on yourself as the entrepreneur or invest through a venture fund portfolio where pros do the work. Over the years I’ve invested personally as entrepreneur, angel investor, and venture fund investor. Outcomes ranked by ROI are 1) entrepreneur, 2) venture fund, and..distant 3) angel investor.

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