The Economics of Angel Investing Work Against All But A Select Few

To be involved in angel investing, at some point in the process one signs a document indicating that they are an accredited investor and presumably understands these are risky investments, meaning this is money that you should probably not count on and expect to never see back.

Beyond that there are many theories about how to invest this money wisely, wisely being defined here by getting a return ideally more that you could earn by other investments. A lot has been written on the power law which is as relevant for angel investors, as for VC firms. So here are the key points in the article by Tucker Max in case you did not read it, first a quote from Sam Altman, President of Y Combinator,

“It is common to make money from your single best angel investment than all the rest put together. The consequence of this is that the real risk is missing out on that outstanding investment. Don’t try to get good deals on valuation hope for these $20-$30 million exits because too many things go wrong.. and if you look at people who have been really successful angel investors, they are the ones that take bets on founders and ideas that they believe can be huge, and cheerfully lose money a lot of the time.”

And then the advice from Tucker Max which I agree with clarification that ton is obviously an exaggeration and maybe at least 20 is reasonable.

  1. Invest in a ton of start-ups, be cool with watching most fail and,
  2. Have enough money to do both initial investments, and serious follow on round funding (at least pro rata, because tripling down on that one company that makes your whole portfolio is how you make pretty much all your money).

I have found that the angel groups that I am involved sort of follow this advice but also regrettably imo tend to not promote or emphasize it enough.

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