Over the years I’ve talked with a number of friends that have expressed interest in angel investing. Typically, they say something like, “I’m looking to make 10 investments so that I’m sufficiently diversified and financially successful.” Then, they offer up an oft repeated refrain of how the investments will play out:
- 3 failures ($0)
- 3 get the investment back (1x)
- 3 make a good return (2-3x)
- 1 excellent return (10-20x)
After 10+ years of angel investing, and many lessons learned along the way, I’m confident that this 10 investment scenario represents the best (luckiest?) of the best angel investors.
Everyone feels above average at angel investing. Not just merely above average, way above average.
The reality is that angel investing is hard. In fact, angel investing should really be viewed as charity work in most cases.
I’m reminded of this phenomenon after reading the recent article The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital Now, venture investing should be easier than angel investing as the startups are more mature with metrics, customers, and operating history. Only, after analyzing a number of returns, the authors showed that to consistently generate good returns, VCs need to invest in 500 startups. 500!
From the article:
Funds with 500 portfolio firms have a 13.5 percent median return, compared to 10 percent for the 15-investment funds. In fact, the returns of the worst (fifth percentile) ultra-large VC funds are the same as the median returns from undiversified VC funds.The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital
Now, I do recommend angel investing but with the caveat that it should be done for the enjoyment of helping entrepreneurs, not for strong financial returns. If financial returns are the motivator, plan to do it extensively across hundreds of startups.