How to Angel Invest: How Much to Invest
September 14, 2018 | By Vela Wood
Disclaimer: This blog post should not be viewed as investment advice. Investors should speak to their investment advisor before making any investments. The ideas in this post are a summary of ideas presented by David Rose in his book, Angel Investing. For a deeper understanding of angel investing and to read these ideas in context, we highly recommend picking it up.
How much you should invest depends on your risk tolerance, but most importantly, your income. Investing in startups is very much a numbers game, so it helps to have multiple investments within this asset class. According to Angel Investing, here are a few factors to consider when deciding how much of your funds to allocate for your angel investments.
Limit your angel investing to:
- 10% of your investment portfolio; or
- 10% of your annual Free Cash Flow
For improved odds of favorable returns, in a 5-year period, expect to allocate enough to invest in 20-25 companies with about 50% of your initial investment reserved to participate in follow-on financing. So, if you have $5 million to invest:
- 10% of this is reserved for angel investing = $500,000
- Dividing this by (25 x 1.5) will account for investing in 25 companies with an initial investment and 50% of this initial investment reserved for follow-on financing for each investment
- So your first check for each company will be approximately $15,000
Special thanks to Vela Wood law clerk, Ikenna Okoro, for his assistance with this series.