Let’s talk about something every angel investor wrestles with: how many startups should you back? It’s one of the trickiest questions in the investment world. It’s not just about money; it’s about strategy, risk, and the desire to do more than just make a return. This question digs into the core of what angel investing is all about.
When you first start investing, it’s tempting to go all-in on one or two startups that seem like they’re destined for greatness. Maybe it’s a shiny pitch deck, an innovative idea, or a charismatic founder who makes you feel like you’re looking at the next Steve Jobs. But let’s be honest: most startups don’t become unicorns. Some won’t even make it out of the starting gate. That’s the hard truth. So, spreading your bets, or diversifying, is key.
The question is: how do you do that without overextending yourself or diluting your returns? Let’s break it down.
Why Portfolio Size Matters
The first thing to understand is why the size of your portfolio matters. This isn’t about ego or bragging rights. It’s about playing the odds. Startups are risky—probably one of the riskiest investments out there. The statistics are sobering: most startups fail. In fact, data shows that about 90% of startups don’t make it. If you put all your money into one or two bets, the odds are not in your favor.
A well-balanced portfolio spreads out your risk. If you invest in 10 startups, the failure of one or two isn’t going to sink your entire strategy. Instead, you’re giving yourself a better chance of having at least one or two big wins. And in angel investing, it’s often the one big win that makes up for all the losses.
Think of it like buying lottery tickets, but with a lot more thought and control. Each startup represents a ticket, and the more you hold, the better your odds of having a winner. Unlike a lottery, though, you can significantly influence the outcome by choosing startups with strong fundamentals, exceptional teams, and clear growth potential.
This concept of balancing risk and reward is especially important for angel investors because we’re dealing with high levels of uncertainty. Even the most experienced investors get it wrong sometimes. But having a larger portfolio gives you more opportunities to get it right.
A larger portfolio doesn’t just improve your chances of success, it also allows you to learn more. With each investment, you gain insights into different industries, business models, and founder dynamics. The lessons you learn from failed investments are just as valuable as those you learn from successful ones. This is an ongoing process that makes you a smarter and more strategic investor over time.
Balancing Risk and Reward
Not all startups are created equal. Some are high-risk, high-reward gambles. These are the ones chasing moonshots, working on revolutionary ideas that could change the world—or fall flat on their faces. Others are more stable, with less glamorous but more predictable growth paths. These are the steady players.
Your portfolio should reflect a mix of both. Think of it like building a team. You want some star players who could potentially win the game on their own, but you also need reliable players who can keep things moving and minimize the damage if the stars don’t perform. For angel investors, this means balancing your portfolio between:
Moonshots: These are the companies with sky-high potential but equally high risks. Think biotech startups working on cutting-edge treatments or AI companies trying to push the boundaries of what’s possible. These startups could make you a fortune—or leave you with nothing.
Steady Builders: These are companies in established industries, solving problems in practical ways. They might not make headlines, but they’re more likely to generate consistent returns. For example, startups providing essential software tools or offering innovative takes on traditional businesses often fall into this category.
It’s important to note that balance doesn’t mean equal weighting. If you’re willing to take more risks, you might allocate a larger percentage of your portfolio to moonshots. If you prefer stability, you might lean toward steady builders. It all depends on your investment goals and risk tolerance.
Balancing risk and reward also involves assessing your own appetite for uncertainty. Some investors thrive on high-stakes opportunities, while others prefer a more measured approach. It’s helpful to revisit your risk tolerance periodically, especially as your personal financial situation changes. The way you approach risk early in your investing journey may be different from how you approach it later on, as you gain more experience and accumulate wins (and losses).
The "Rule of 20"
Here’s a simple framework you can use: the Rule of 20. This is based on a popular idea in the investment world that suggests you need to back at least 20 startups to have a decent shot at success. Why 20? Because in a typical portfolio, only a handful of investments will make significant returns. If you invest in just a few startups, you might miss the one that could have made all the difference.
Out of 20 startups:
1 or 2 might be massive successes.
5 or so might return a decent profit.
The rest could fail or break even.
This doesn’t mean you have to write 20 checks all at once. You can spread your investments over several years, keeping an eye out for opportunities that fit your strategy. The goal is to reach a level of diversification where your portfolio is not overly dependent on the success of any single investment.
It’s worth mentioning that the Rule of 20 isn’t a hard and fast law. It’s a guideline. Some investors prefer to back even more startups to further spread out their risk. Others might focus on a smaller number but invest more heavily in each one. The key is to find a number that works for you and stick to it.
The Rule of 20 also provides a useful benchmark for gauging your progress. If you’re just starting out, it can feel daunting to think about building a portfolio of 20 startups. But setting a long-term goal of reaching that number helps you stay focused and disciplined. It’s about the bigger picture—not every individual investment needs to be a home run. The cumulative effect of many well-considered bets is what ultimately yields returns.
How Much to Invest Per Startup
Let’s talk numbers. Once you’ve decided on a portfolio size, the next question is how much to put into each startup. This depends on how much money you’re working with. The golden rule here is to never invest more than you can afford to lose.
For angel investors, the typical recommendation is to allocate no more than 5-10% of your net worth to startup investing. From there, divide that amount by the number of startups you want in your portfolio. For example, if you’re allocating $200,000 and you plan to invest in 20 startups, you’d invest $10,000 per startup.
Of course, you might want to adjust these numbers based on the startup’s stage. Early-stage startups are riskier, so you might want to invest smaller amounts in these and save larger amounts for later-stage startups with more traction.
When thinking about how much to invest per startup, it’s also helpful to consider the potential for follow-on investments. Startups often go through multiple rounds of funding, and as an angel investor, you may want to increase your stake in a company that’s performing well. This requires setting aside some capital for future rounds.
The idea of setting aside capital for follow-ons is particularly important if you believe in the startup’s trajectory and the team’s ability to execute. Follow-on investments allow you to maintain or even increase your ownership stake as the company grows. It also sends a strong signal of confidence to other potential investors, which can help the startup attract additional funding. However, it’s critical to strike the right balance—you don’t want to pour too much into follow-ons at the expense of overall diversification.
Timing Your Investments
Another important factor is timing. Don’t rush to fill your portfolio. Angel investing isn’t a sprint; it’s a marathon. Great opportunities don’t come along every day, so it’s better to wait for the right ones than to invest in something mediocre just to hit a number.
At the same time, don’t wait forever. The startup world moves fast, and opportunities can disappear just as quickly as they appear. A good rule of thumb is to aim for steady progress. Set a goal of investing in 2-3 startups per year and reassess your strategy annually.
This approach allows you to stay involved in the startup ecosystem without feeling overwhelmed. It also gives you time to learn and adjust your strategy based on what’s working and what isn’t.
Pacing yourself is crucial because the startup ecosystem is highly dynamic. Today’s hot sector might not be tomorrow’s, and you want to be able to capitalize on emerging trends rather than locking yourself into a static investment plan. By gradually adding to your portfolio, you remain agile and responsive to new opportunities. This strategy also helps in mitigating the impact of external economic factors, as spreading out investments over time reduces your exposure to market volatility.
The Role of Follow-On Investments
Your initial investment is just the beginning. Many angel investors overlook the importance of follow-on investments—putting more money into a startup during later funding rounds. This can be a great way to increase your stake in a company that’s performing well. But it also requires setting aside some of your capital for these opportunities.
When deciding how much to allocate for follow-ons, think about how much you believe in the startup’s potential. If you’re confident, doubling down could pay off big time. Just be careful not to overextend yourself.
Follow-on investments can also serve as a hedge against the inherent unpredictability of early-stage startups. Early investments are often speculative, based on the promise of a team or an idea. As the startup progresses, it either proves its value or doesn’t. Follow-ons are an opportunity to back the companies that are meeting their milestones, gaining traction, and showing real potential for success. However, this requires disciplined financial planning—knowing how much to reserve for future rounds and ensuring you don’t tie up too much capital too soon.
Diversifying Across Industries
Another way to strengthen your portfolio is by diversifying across industries. Investing in startups from different sectors can help protect you from industry-specific downturns. For example, if you’ve invested heavily in tech and there’s a market crash, your entire portfolio could take a hit. But if you’ve also invested in healthcare, consumer goods, or renewable energy, you’ll be better insulated.
That said, don’t spread yourself too thin. It’s better to invest in industries you understand or have a strong interest in. This will make it easier to evaluate opportunities and stay engaged with your investments.
Diversifying across industries also adds an element of resilience to your portfolio. Economic downturns or market shifts can disproportionately affect certain sectors. By holding stakes in a variety of industries, you reduce the likelihood that any single market event will severely impact your overall portfolio. This type of diversification also opens up different types of growth opportunities—while one sector might be stable, another might be experiencing a boom. Balancing these dynamics is key to long-term success.
Learning from Others
One of the best ways to refine your strategy is by learning from other investors. Join angel investor groups or networks where you can share insights, hear about new opportunities, and learn from others’ experiences. These groups can also provide access to deal flow that you might not find on your own.
Engaging with a network of like-minded investors also helps in building relationships that can lead to co-investment opportunities. When multiple investors back a startup together, it not only spreads the risk but also brings a diverse set of skills and resources to the table. Collaborating with experienced investors allows you to learn from their approaches, understand how they evaluate startups, and get a better sense of which sectors or business models are currently gaining traction.
Learning from others can also help you avoid common mistakes. Many angel investors make similar errors in their early investments—like putting too much money into a single startup or failing to diversify properly. By observing the experiences of others, you can refine your approach, avoid pitfalls, and accelerate your learning curve.
Wrapping It Up
At the end of the day, building a startup portfolio is both an art and a science. It’s about playing the numbers, trusting your instincts, and staying disciplined. A well-balanced portfolio doesn’t just maximize your chances of success—it also makes the process more enjoyable.
Investing in startups is a journey of continuous learning. You’re not just investing money—you’re investing your time, energy, and passion. The rewards go beyond financial gains. There’s the thrill of supporting innovative ideas, working with talented entrepreneurs, and being part of a community that’s striving to create the future. The portfolio you build becomes a reflection of your values, your interests, and your belief in what’s possible.
For those looking to explore strategies like these, The Enlightened Angel: Mastering the Art of Startup Investments offers a wealth of insights to refine your investing approach. Download it for free and take the next step toward becoming a smarter angel investor.
