Building a Portfolio as an Angel Investor

What top startup investors have to say

Just wanted to start by saying thank you to everyone who joined our March cohort of VITALIZE Angels! We’re so excited to have you join our community of 450 angel investors!

Applications for our April cohort are now open and will once again have limited available spots. Please apply below if you’re interested.

Angel investing is much different than investing in public companies - it’s inherently riskier.

You’re oftentimes investing in companies that may be little more than an idea, have few customers, and have little tangible traction.

These aren’t public companies where you can look through their financials and years of performance history.

But while investing in private companies as an angel investor comes with more risk, it also comes with a much higher upside.

And, in order to minimize risk as an angel, you should build a portfolio of investments across a number of startups, just like Naval Ravikant, co-founder of AngelList, mentioned:

A diversified portfolio of credible startups is a wealth generation machine.

Naval Ravikant

But how?

Well my friend, I’m going to share what a few angel investors had to say about building a diversified portfolio.

In a presentation Gale Wilkinson did, she mentioned how angel investors will build a portfolio of at least 15 investments, even as many as 100+ over a period of 3-5 years, with most angels doing 3-10 deals per year to have the possibility of portfolio-style returns.

Sharing his lessons from 80+ angel investments, Dharmesh Shah, co-founder of HubSpot had this to say about building a portfolio:

You need a big enough portfolio of investments that you believe could be breakthroughs to have a chance at a break-out return on one or more of them.

Let’s say ~20 deals or so.

On the other hand, doing too many deals too fast is suboptimal.

First off, you want some of the data from your early investments to be “training data” for your selection algorithm.

You’re not going to get conclusive data for some time (i.e. exits) — but you will get a sense for whether the companies you’re picking have:

a) great founding teams

b) can keep driving growth

c) treat their investors respectfully

d) can overcome inevitable bumps in the road

For example, I’ve talked to new angel investors who say they’re going to do 30 deals a year or so, that’s too much — especially early on. You should start slowly, learn and then scale up.

Dharmesh Shah

Of course, angel investing is just one bucket as far as where you’ll deploy your capital.

In 2017, Fred Wilson, co-founder of Union Square Ventures, wrote an article about diversification that I think is still a good way to look at your portfolio:

I like a mix of cash (t-bills, money market funds, etc), blue chips stocks (Amazon, Google, etc), real estate (income producing with little to no leverage), and a risk bucket (venture capital, crypto, etc). I think 25% in each would be a good mix. We have more in the risk bucket but I am in the VC business professionally and have been for 30+ years. 25% in each is where I’d like to get to in time.

Fred Wilson

The main takeaway from all of this?

Diversify, diversify, diversify.

And you can only do that by getting started 😜 

Thanks for reading today!

What topics would you like us to cover next?

Reply to this email or ping me on Twitter to let me know.

Take care,

Justin