You’ve probably heard a lot about angel investing, how people in the know are getting into the next big thing early and making double, triple, or even quadruple % returns.
But the whole area is a bit of a new asset class for most everyday investors – so what is all the hype about? And is it even right for you to invest in? This article demystifies all this and more.
Four key points we’ll cover:
- Angel investing can lead to crazy returns (but done badly can result in losses)
- How to get access to winners and avoid losers.
- Limiting your overall portfolio in angle investing.
- Think ethically.
By the way, we’ve written a handy blog about angel syndicates (they are a group of investors clubbed together to invest in an early start-up). We’ll also touch on this here.
1. Angel Investing Can Lead to Crazy Returns
Consider the following example and think – is there any other business investment that can make returns like this?
Over the past 30 years, tech entrepreneur and VC Peter Thiel has invested in some of the biggest tech companies. This includes starting PayPal with Elon Musk. In 2004, Theil became one of the first outside investors in Facebook, when he offered Mark Zuckerberg a $500k angel investment. He’s now worth is worth $2.3 billion
30 years, $2.3 billion. How else can you do that?
But remember this – many of these guys (probably all) built a portfolio of companies – many of whom failed. That was the key to their success.
This is key – your network can help you lead to these returns – As we’ll go into this in the next section.
2. How to Access Winners and Avoid Losers
So how do you get access to the winners, without getting sunk by the losers? You do that by
(b) Investing in top quartile deals only; and
(c) Making sure you double-down on your winners (by investing in future rounds too).
Best way to do this? Investing with a syndicate or a top VC fund. See next.
Invest with a VC or a Syndicate
I’ve written everything you need to know about angel syndicates here. A very, very brief overview:
Try this. Google early tech investors, e.g. in Space X, Uber, Instagram, etc. You’ll notice the same names. The reason why – they have access to a network that you don’t. This network is giving them exclusive deals, making them worth billions.
This is why we emphasis joining an angel syndicate or a VC which will get you these exclusive deals.
Diversifying and double-down on winners
There’s a handy formula for this recommended by VC Jason Calacanis, an early investor in Uber.
It’s up to you how you invest, however he recommends:
- Making 30+ investments over a 3-year period,
- Invest in start-ups that have products in market and revenue already (there are 1000s of them); and
- You want to make very small bets when you start and then go 2-10x on the winners.
Bonus point: Jason believes from his experience, the next 6 to 12 months could be the best time to start angel investing since the Great Recession.
3. Limiting Your Overall Portfolio in Angel Investing
If you’re excited about the potentials of big returns, hold up. Only invest what you can afford to lose. Start-ups will sell you a dream, but most fail.
It’s up to the angel how much they want to invest. The amount can vary from £1000 to millions. You should only invest a limited portion of your overall portfolio into this stuff as it is illiquid and unpredictable.
Typically, people advise going for around 10-30% of your overall portfolio into alternative investments like start-ups. This should be money you can afford to live without for a decade or so if necessary.
Use this an example: set aside, for example, 20% of your overall portfolio for angel investing and then look to invest in 20-30 different companies with that money. That way you diversify your risk and increase your chances of picking a massive winner.
4. Think Ethically
You care about the good your money does. Angel investing is investing in start-ups that are trying to solve massive problems in climate change, medical technology, education, infrastructure etc. Your money will be genuinely acting as a force for good. So, if you care about impact when it comes to investing – this is a great asset class in that regard.
Is Angel Investing for You?
If you want a chance to make a lot of money, have a stake in an exciting business, a possibility to change the world – then it’s a yes.
Remember to budget to what you can afford to lose. Do your research. As always, the best way to learn is to get involved. It’s probably the best time to start getting involved.
Check out what is probably the best angel investing course out there right now – and its completely free too: The Ultimate Startup Course.
Check out lots more reading on angel investing in our guide here.
Here’s some further reading from IFG:
We’ve also answered the question of whether start-up investing is sharia-compliant here. In short, the answer is yes.
We also have our own podcast – Millionaire Muslim – where you can listen to our interviews with start-up founders, investors and other participants in the VC ecosystem.