Diversification Through Angel Investing

What is Angel Investing? By its very definition, angel investing, also known as private investing or seed investing, usually sees the financial backing of startups or entrepreneurs provided by individuals with high net worth. In exchange for their investment, they receive equity and ownership in the company itself. Typically, friends and family are the first individuals tapped as angel investors. With as little as a one-time contribution, an angel investor is offering, through their investment, a one-time boost of support that goes a long way to helping a business through its early growing stages. The question now is, what is it that an angel investor needs to look for when investing?

Invest in people, not ideas

When it comes to the business of investing, one of the biggest misconceptions is that all you need is a good idea.  However, as it turns out, having a good idea is great, but it will not necessarily get the job done.  The real determining factor of success is in the execution.  An investor will hear thousands of great ideas, especially, if they do not have the confidence in the entrepreneur, and that the concept can execute properly, they will undeniably decide to pass.

 

There needs to be a proprietary advantage

Although the idea itself usually comes in second on an investors list, it still needs to make sense and have a rock-solid foundation.  What do we mean by “rock-solid”?  This means that many investors will need to know that the business model has a certain amount of proprietary advantage in the early stages.  

Proprietary advantage guarantees that there is some wall of assurance to prevent competitors’ entry, or to reduce the likelihood of the investor potentially being ripped off.  Many times, a proprietary advantage may be present in the form of a patent. 

 

The entrepreneur needs to prove their worth

You may have an idea, and your concept is a solid one. However, if the interaction between those involved is not sufficient, then one would be cautioned before investing a large sum of money.  If the entrepreneur wants your investment, they should also be willing to prove their idea’s worth.  This can be something as simple as progressively moving the business in the proper and most beneficial direction and working towards an end goal.  It is sad but true that in most cases, most entrepreneurs stop trying to prove themselves once they have the check in hand. Passion can fizzle once money comes into plan, and this is something you will need to consider.

Before investing, you need to make sure the entrepreneur can prove themselves in many areas, such as their work ethic, personal values, ability to deliver, and proof that the team they currently have in place can work well together.  If all these necessary pieces are in place, then you can feel assured to have an investment to consider.

With all that said, the question now is as an angel investor, just how many companies should you invest in at a given time?

 

The basics

Diversification is the process of investing in multiple companies, in the effort to reduce any possible risk if one of them does not perform as well as anticipated.  Ben Graham, the author of The Intelligent Investor, was the individual who made the idea popular that fifteen is the magic number when it comes to diversification.  After that number, Graham feels that the introduction of more investments does little to nothing to reduce risk to your portfolio.

However, in an article posted by Robert Wiltbank on TechCrunch, Wiltbank offers that a good starting place for angel investors new to the game is more like somewhere around one dozen.  

With these two points of view, the common suggestion of around 18-20+ holdings will provide sufficient investment to diversify any potential risk properly. While some of your investments may fail, others will thrive, providing you with the most efficient returns in your investment portfolio.

 

Where do you go from here?

With the above information, we can now examine how many companies an angel investor should invest in for the best returns. There is sufficient evidence that indicates that an individual creating holdings of up to 18-20+ investments should aid significantly in the reduction of risk in their portfolio overall and keep it balanced.  However, it also suggests that any additional investments above that number will do little in reducing the risk or loss overall. 

 

The natural plateau

Each portfolio of investments will ebb and flow in their content and number of investments.  As some investments exit your portfolio, new ones will be added along the way.  The plateau of your portfolio will be determined by how many good companies are combined, against how many may be fast failures.  It is crucial to remember that what may work, or have worked, for one angel investor will not necessarily work for another.  Each portfolio should be viewed as a snowflake—unique and different than the next.  

 

Do not stay stagnant

When beginning to build your portfolio, it is best to keep a somewhat brisk pace of investing, so that you may get a jump on diversifying your investments.  However, at the same time, you need to make sure that you do not make the mistake of over-extending yourself so that you may maintain your pace for the long-term.  The amount of investment capital in your investments will vary widely, and what companies may seem a low-cost investment, can easily be countered by the higher-cost companies.

How diversified you want your portfolio to be is a decision only you can make.  As in any business aspect of life, a certain amount of research and study on your part will be involved in deciding which companies to add to your portfolio.  The takeaway here is that you need to get to know the individuals you are investing in and with, more so than the ideas they are pitching to you.  It is with this knowledge that you will be able to determine if the company you are looking to invest in is one that is the right choice for you.

Finding the right investment can be difficult. EnrichHER can help you create a diverse, rich, and low-risk portfolio that offers great returns. Sign up today for financial tips from experts and go through our long list of startups, all run by experienced, independent women, and choose one that fits you the best. 

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