This is Part 4 of a series on angel investment asset allocation strategies. Please read Part 1, 2, and 3 here:
Here, we’ll show you a way to determine how much to invest in each deal; talk about typical deal size we’ve been seeing; and discuss how sticking to your angel investment plan can help you leverage the market climate.
After reading and completing the steps outlined in the articles above, you may then determine how much to allocate to each deal and decide on an investment timeframe.
David Hehman, former chair of North Bay Angels, notes that each company “may take 3 to 7+ years to succeed/fail.” Those that succeed will provide additional funds for future angel investments.
In the example above, we calculate that you may invest $20,000 (plus $20,000 follow-on reserves, which comes to a total of $40,000) in each company. But how much to allocate to each deal/company is really up to you.
Let’s look at the deal sizes we’ve been seeing as a point of reference:
You might write the same check size for all companies, or you might allocate more money to your favorites. No matter how you go about it, remember to also allocate a portion for follow-on investments.
Hehman then points out how sticking to your plan can help you leverage the market climate:
Another note about time is that when everyone is hibernating in bad time, this is a great time to invest.
If you allocate a certain amount for each quarter or year, you can stay investing evenly through lean times.
When the markets are bubbling or overheated, it is the time to be disciplined, and stick to your plan, not adding any more to your portfolio than you projected.
What Hehman is saying is that if you’ve decided to invest in 5 companies every year, don’t invest more than planned when there’s the investment climate it too “hot,” and stick to your angel investment plan even during bad times. Fact is, many greats companies like Apple, Hewlett-Packard, and Microsoft were started during the recession.
Sim Simeonov, an angel investor and a former VC, also stressed that financially-focused angel investors must invest “thoughtfully and consistently over a period of years to take advantage of portfolio effects.” Angel investing “isn’t something to casually engage with.”
Angels should start by asking themselves the following question: “How much can I consistently invest in startup companies for at least five years, regardless of what the public markets do?” Then, they should take this amount and look for ways to invest in 5 or more companies per year.
* For series, references are published in the last installment of the series.