Optimizing your Angel Portfolio through Angel Funds
There are a few key concepts to focus on when it comes to getting into the angel investing world. One of the best ways to optimize your portfolio and diversify your risk is to invest through an angel fund. By investing in a fund, much of the high-risk decision work is shared between members with varying industry expertise, so you can lessen much of the stresses of building your portfolio and gain diversification outside of your individual expertise. Angel funds can be one of the easiest, fastest ways to diversify and optimize your portfolio, and the benefits are numerous.
Law of Large Numbers and Due Diligence
The “Law of Large Numbers describes the benefits of investing in a larger quantity of companies.”¹ Investments run a stark parallel to many laws in statistics, and similar to how more trials yield more accurate results in research, larger numbers of investments typically will yield a higher rate of return. The probability of breaking even increases as the number of companies you invest in increases, so being able to invest in anywhere from 30-80 deals is a highly recommended route.
Larger numbers of investments typically will yield a higher rate of return.
Paying attention to the responsibility you have in the companies as an investor can be an incredible task when involved in large numbers of deals. As an investor, you must show due diligence and adequate responsibility with the deals.. For this reason, angel funds are an incredible asset, for their ability to diversify and increase portfolio size, while sharing that responsibility of management with other investors. Showing poor responsibility and failing to exercise due diligence in deals is a quick way to fail in angel investing, so joining a fund provides access to more deals without shouldering all that responsibility as an individual investor.
Seeking (and Finding) Good Deals
More than half of angel investments lose money, but some deals can yield incredible rates of return. Angel funds are an effective way to come across the best deals available in your area of interest or community. Seeking out dealflow is an exercise in community relations, but joining a group of investors allows for greater investigation into deals. With more eyes, and more funds going to companies, you can be more likely to invest in deals that are safer, better explained, and can return those coveted 2X, 3X, or 4X returns. With safe, smart, and aggressive investing that can be done in conjunction with Angel Funds, hunting for incredible deals that can yield up to 30X returns is a far more reasonable task.¹
One of the worst outcomes in an investment is to suffer an the loss of a company going bankrupt, and the reality is, as you continue to grow your portfolio on your own, the likelihood of investing in deals that go awry is far more likely. For this reason, investing in angel funds mitigates investor risk. There are two factors that lead to most investments running into issues: poor company management, and insufficiently gauging the risks of the deal.²
It can be challenging to investigate a deal properly when investing on your own. Angel funds can be beneficial here, however, in vetting a management team. A company worth investing in must have a management team that is strong in a number of factors. First, they should often have both knowledge and experience in the industry the startup is targeting. As well, the team should have skills that complement each other efficiently and offer a strong ability to work together and scale that work as the business grows. Finally, one factor that is often overlooked is that the management team should be effective in growing a positive company culture, as culture is imperative to a startup’s success as it grows. It can be hard for solo investors to vet these characteristics well, so angel funds offer a strong upside in one’s ability to check these deals out early.⁴
Adding a portfolio diversification strategy on top of due diligence becomes increasingly complex as portfolio size increases. As an investor in an angel fund, due diligence responsibilities can be distributed and shared, and investing in companies that will have been examined by a larger group naturally decreases the odds of making an investment in a company whose risks have been inaccurately assessed.
Diversification and Education
The best way to diversify your angel portfolio to lower your risks and increase your chances of success is through diversification. The total number of deals is the best diversification you can have, so joining an angel fund allows you to invest in more companies without the added stress of shouldering so much responsibility on your own.
Most experts counsel solo investors to avoid industries that are foreign to them, which will naturally narrow the opportunities for investment one can find. When investing in a fund, you are able to learn more about industries outside one’s area of expertise and benefit from the expertise of other individual investors’ knowledge - resulting in an ability to seek out deals in a wider range of industries and locations. Other investors will likewise benefit from the knowledge and expertise that you bring to the group. Now, instead of seeking out the best deals in just one category of companies, you’re able to safely and reasonably commit to investments from a much greater pool.³
“Knowledge is Power” when investing.¹ A greater understanding of what makes deals profitable and attractive brings about a better chance of success while lowering your risks. Angel funds directly enable you to become a more educated investor by surrounding yourself with other investors that have different fields of expertise and different levels of experience. As you grow your portfolio, knowledge, and ability to find good deals, angel investing can continue to yield you better returns with a smaller risk of failure.
 Hudson, Marianne. “Build An Angel Portfolio Like the Experts.” Forbes, Forbes Magazine, 17 June 2015, www.forbes.com/sites/mariannehudson/2015/06/17/build-an-angel-portfolio-like-the-experts/#25f16876309e.
 “Building a Startup Portfolio That Will Get You There.” Angel Investing Returns - A Guide to Exits for Angel Investors | Seraf-Investor.com, seraf-investor.com/compass/article/mule-team-building-startup-portfolio-will-get-you-there.
 “Join an Angel Group.” Home | ACA, www.angelcapitalassociation.org/info-for-investors/investor-form/.
 Hudson, Marianne. “7 Factors For Deciding To Invest In A Startup -- Or Not.” Forbes, Forbes Magazine, 18 Sept. 2014, www.forbes.com/sites/mariannehudson/2014/09/18/7-factors-for-deciding-to-invest-in-a-startup-or-not/#f2ded2c344bd.