How much do I need for angel investing?

(repost from https://snleigh.wordpress.com/)

This came up when lunching with a friend a few days back.

Truth is, I thought it needed a lot of money too. I never thought to angel invest and for me, it was a natural progression from my startup mentoring and advising work. Der Shing and I saw angel investing as a way to diversify our investment portfolio now; but if I am really honest with myself, we started it back then because 1) we wanted to inject some variety to our daily work; 2) we had spare cash.

And interestingly from the past few years of angel work, and also reading some best practices, I now have the new thinking / approach – start with small quantums in multiple deals and done over a few years. The goal is to build up a portfolio of 20-25 companies over some 6-8 years, of which you should follow on on the next rounds of the good performers with equivalent to first tranche investment. The ROI goal for this portfolio is to give you 3-4 times your capital returns at the end of around 10 years.

Key thing to remember is all these picking and investments are done over 6-8 years. So, assuming initial 25k bites is (25k x 20 startups) + maybe 8 follow ons at 25K each = you should need about $700k over 6-8 years.

700k over 6-8 years is still a lot and angel investing is really high risk!!

Yes but it’s ok if you know how to structure your finances and you want to make beyond your basic 4-5% balanced portfolio returns.

The primary positioning is this: the cash you need for angel investing should not be more than 15-20% of your investment portfolio (or annual cash flow needs if you have regular income).

So using my 25k bite size example above, it means you should either have an investment portfolio that exceeds 3.5m at least or if your regular annual disposable income exceeds 500k or some combination of both. You know your own circumstances best. Of course if you say you only want to put 10% of net worth at play, then everything needs to double.

Sounds risky and what if I am really bad at picking companies…

Let’s run through some scenarios:

Scenario 1) All of your pickings bombed!

Super unlikely. But if it does happen, it’s still just <15-20% of your portfolio, the rest of your portfolio (75-80%) still gives the 4-5% returns. Your lifestyle is basically not affected. But in the process of angel investing, you learn a lot. Yes, desire to learn has to be a key reason why you angel invest.

Scenario 2) your picking is not so great, some companies bombed but a few returned capital plus a bit of returns. Net result is some small 1-2x returns over time.

My earlier portfolio (pre-2013) is like that. I think I am still happy about it generally. That journey helped me appreciate entrepreneurship even more, and gave me some valuable insights on founder mindsets, learn to assess founders even more (hopefully better), and all these help me be a better advisor and better pick my newer investments.

Scenario 3) you get 3-4 times return or more

Numerically that means 1.4-2.1m returns. Not too shabby for picking 20 startups. Angel portfolio wise, it means a few of your pickings bombed, some at least returned capital and a few were really good picks that got really nice exits.

Now, it is possible that after 8 years, you are still holding a few startup investment. This is part and parcel of the private equity game. We believe we should hold the investment until it has reached market potential and not sell out at earlier rounds. Sometimes it possible so it’s up to you. We like the angel investing process so much we have set a goal for 100 startups which represents a rolling process every 8 years or so for 4 cycles. So we are quite patient and willing to hold. I am sure founders will also appreciate the patience.

So in a nutshell, angel investing definitely requires you to have time, interest and some money. A good angel investment portfolio should give you fair financial returns but more importantly it allows you to experience businesses and industries beyond your day to day job. Startup process is one intense way of living life and you have to experience it to understand it. For us, the best reward is knowing we helped a fellow entrepreneur impact their space and their lives in a positive way!