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?