Assume You Are Going to Lose All Your Money
Treat success as a complete surprise. Successful venture capital firms generate approximately 80 percent of their returns from less than 20 percent of their investments. The chances are high your angel investments will be losing bets.
Qualified or Accredited Investors Need to Have a Net Worth of At Least $1 Million
The SEC requires these minimums for angel investors because it is the minimum regulators believe is necessary for an individual to withstand the loss of the investment.
Take a Portfolio Approach
Whenever you invest in a risky asset class like startups, movies or new artists, you need to have a portfolio, because the law of small numbers will likely lead to a complete loss on your investments. Remember talent acquisitions, which represent the vast majority of successful angel investments, usually result in a loss for the investors. Try to build a portfolio of at least 15 companies.
Limit the Size of Your Angel Portfolio to 10 Percent of Your Investible Assets
Even sophisticated institutions that have the financial wherewithal to take significant risk and have access to the premier venture funds tend to allocate no more than five percent to ten percent of their portfolios to venture capital. You don’t have the staying power or the financial expertise of these endowments, so try to limit the size of your overall bet.
Contrary to my own advice, I only invest in three to four deals per year and they are with companies that I have passion for not only their product or service but also their team. At least if I don’t make money, I’ve learned a lot and had fun.