The skewed returns for angel investments report by Rob Wiltbank in 2007 for the US and in 2009 for the UK describe a clear strategy for angel investors:  diversity* – invest in a large number of deals (ideally 25 or more) and  scalability – invest only in deals that can scale valuation rapidly (ideally to 20X in five to eight years).
A logical challenge to this strategy would be to suggest that startup companies that plan to scale to only 2X-3X over five to eight years would be less risky than those that scale to 10X or 20X or even 50X in the same period of time. But, when viewed strictly on risk of failure, it does not appear that highly scalable ventures (software companies, for example) have a higher failure rate that low scale ventures such as retail outlets and restaurants. Anecdotal data suggests that funded software companies and restaurants both fail at relatively high rates, about 50% or more. So, I have postulated for several years that ventures chasing large opportunities (highly scalable) are no more risky that ventures pursuing much smaller markets.
If, as Wiltbank has shown, only 1 in 10 angel investments will provide all of investor upside (return on investment), then that home run must achieve an ROI of 20X or more for angels to achieve portfolio returns of 25% IRR or more (justifiable returns for these risky investments). If we need 20X home runs to achieve reasonable investment objectives and we have no idea at the outset which one of ten investments will provide us with our home run, then clearly all angel fundable deals must show the potential at the outset to scale to at least 20X. To invest otherwise risks substantially lower portfolio returns.
What number of angel investments is sufficient diversification? Clearly, skill and luck enter the picture. But, generally, one would expect that 8-10 startup investments would represent the minimum diversification and 15 or more investments would reduce the risk of low returns. Nonetheless, I am suggesting that angels consider 25 or more lifetime investments to substantially reduce risk and increase the likelihood of meeting investor portfolio IRR expectations of at least 25%.
*in this case, diversity in numbers of deals is the critical issue, not diversity in a variety of business verticals.
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