What Happens After you Click 'Invest'?
Show me the Money!
The first thing everyone asks when they start with Angel is, “How much money can I make.” We’ve all heard about the angels who invested $25K in the Uber seed round and 9 years later walked away with $125M after the IPO. Obviously, Uber doesn’t happen every day.
The Power Law
Angel investing doesn’t work on a bell curve of returns. With startups, the big wins are so big that they more than make up for the losses. It’s called the power law.
Here’s the distribution you’ll see in a diverse portfolio.
50% of your investments will go to 0.
zero. zilch. nada. money gone.40% will return 1-3x and will get you to break even.
10% will 10x+ and drive all your returns.
Within that 10% there will be 1-2% that goes to 100x, 1000x, or more.
This is why (portfolio) size matters.
The reason to build a diversified portfolio is to maximize the chance of having a few big winners in the bunch. If you pick only one or two companies, statistically, they will both go to zero. When 1-2% of companies are outliers, the more companies in your portfolio, the more likely you are to get one that is an outlier. And that outlier will dwarf all the failures.
Pro tip: The power law only applies to tech-scalable companies. CPG investing has a different return profile. We’ll discuss that more later.