Deploying Money as a New Angel Investor
It’s a numbers game
Here's the thing.
Most startups will not return your money.
This could be because…
- the startup runs out of money
- the founders get sick of running it and shut it down
- the founders they keep the company running as a lifestyle brand forever
- the founders get aqui-hired and so they get a nice payout but it’s not a true exit so the investors don’t see any of it
The best way to stack the odds in your favor is to make a lot of investments.
How many? Elizabeth recommends a portfolio of about 50 companies.
How to deploy your money into 50 companies
This doesn’t mean you should go out and find 50 companies to invest in right away.
Like I said before… angel investing is a balance. And you gotta see a lot of companies to know which ones are most likely to go the distance.
At the same time, you gotta get in the game eventually. So what’s the strategy?
Elizabeth recommends making 5-10 small investments per year. By small, we mean $1k-$5k checks per investment.
This would end up costing you between $5k-$10k per year. Not everyone has the means to do this, but if you’re able to follow this pattern that would net you 50 companies within 5-10 years.
By spreading out your portfolio construction over 5-10 years, you’ll be able to learn from your earlier investments such that you can apply those learnings to future investments.
What does that mean for dealflow?
If you have a goal to invest in 5 companies a year, that doesn’t mean looking at 5 different deals.
Elizabeth recommends looking at 100 deals a year to find the 5 best companies to back.
This is where dealflow comes in.
If you don’t have great dealflow, you won’t see 100 companies a year. Or you won’t see 100 reasonably good companies a year, anyway.
Dealflow doesn’t happen organically – you have to find it.
Like we talked about last week, two good ways to find dealflow are by joining a syndicate or mentoring at an accelerator.
Syndicates (ahem) are a good source because there’s some level of vetting that happens before you see the company. The syndicate lead has done the due diligence, so you’re (presumably) seeing a moderately good team.
Mentoring is a good source because you know what’s actually happening at the company.
You know if they’re acquiring customers, or keeping customers around...
You can tell if the founders have drama, or if they’re distracted by feature creep...
And you quickly learn if the problem they’re solving is big enough to get people to pay for a solution.
Reality check time!
Probably your earliest investments will not be great. This is normal.
Like anything, investing takes practice.
Imagine you’ve never used a bow and arrow before. Then someone asks you to shoot an arrow through a hula hoop and hit a target.
You would probably miss the first few times. Eventually you’d start to get closer and closer to the target.
This is investing.
Probably your first few attempts will be misses. As you get better, you’ll learn what went wrong, and apply those lessons to your next shots.
Over time you’ll start to recognize patterns — both good and bad — that will help you identify the best founders, the best products, and the best markets to bet on.
Don't be afraid to deploy any money at all for fear of betting on the wrong startup.
At the same time, don't blow your whole angel investing budget before you've had time to gather learnings.
While you'll probably lose money on your earliest investments, over time you'll get more strategic about who you back.
Starting out as a new angel investor is a tricky balance.
On the one hand, you need to see lots of companies before investing to get a solid understanding of what makes a good startup.
On the other hand, you need to actually deploy your money in order to get learnings and (hopefully) make some money.
I think about this all the time… the balance between watching from the sidelines and getting right into the game.
So at a recent AMA with investor Elizabeth Yin, when someone asked “How should we think about how quickly to deploy money as a new angel investor?” my ears perked up.
Here’s what Eliz had to say.