This is the final installment of a series on asset allocation strategies for angel investors. Please read Part 1, 2, 3, and 4 here:
Here, you’ll learn about allocating assets based on the company’s stage of development and your investment style; calculating the net worth requirement based on your investment criteria; and allocating your investment returns for future investments.
Seed-stage is the cheapest (requires the smallest check size) to get into and generates the highest payoffs but it’s also the riskiest. David Hehman, former chair of North Bay Angels, points out that you may “want to diversify your angel investments in the same way that you diversify any portfolio: across different industries, different risk levels, and different stages (concept, growth.)”
Even so, you may want to avoid investing in industries you don’t understand just for the sake of diversification.
Will Herman, TechStars mentor and Boston angel investor, stresses:
Invest in stuff you understand – bright shining objects attract attention (“we have the basis for a cure for cancer”), but the more you know, the less shiny things often look. If you can’t judge the team, market and product relatively thoroughly, it’s probably not a wise investment.
Having said that, we understand that investors sometimes just have to get their hands on an unknown sector that they’ve developed an interest in. If this is the case, check out Angel Investing: Effective Ways to Invest in the Unknown to learn how to go about this.
If you want to take an active role in the company and plan to allocate a large portion to a particular startup, make sure your intention is clearly communicated with the entrepreneurs. Some founders might welcome your involvement while others might prefer to be left alone. Don’t assume anything. Make sure your interests are aligned with those of the entrepreneurs before cutting that fat check.
On the other hand, if you’re a passive angel investor who’s new to the angel investing game, you may want to start with a smaller amount and co-invest with experienced lead investors, who’ll handle everything from herding investment cats to closing the deal.
As an alternative to creating an allocation pie discussed in Easiest Way to Determine How Much to Allocate to Angel Investing, some angel investors are interested in working the numbers backwards to bring forth the net worth requirement.
Let’s say John Doe wants to
To satisfy his criteria, he’d have to possess a net worth of:
Just run the numbers until you’ve arrived at the figures you’re comfortable with.
Note: Seasoned angel investors suggest allocating no more than 10% of your net worth to angel investing.
Congratulations, you’ve got exits!
Consider Hehman’s suggestion on allocating your returns:
Once the exit occurs, have a plan for what to do with the money. Most likely one third will go to taxes. Of the remaining, you might want to put a third back into your conservative savings, and add a third to your mad money angel investing pool.
Now, have fun and allocate away!
* For series, references are published in the last installment of the series.
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Venture Hype has an interesting concept and an interesting format. It’s apparently well-read. Always good to be controversial and ask probing questions.
