Capital allocate to Angel Investing?
Data that was collected from thousands of active angel investors the common consensus is that venture investing should be in a range of 12-18% of your overall investment portfolio depending on your personal risk – profile. Public companies, REITs, and ETFs make up the majority of my investments. They provide me with a stable source of income and flexibility because they are dividend-generating, liquid investments. I can buy and sell them whenever I like. As you know, investing in early-stage companies doesn’t provide any current income and the investments are not liquid. It’s extremely difficult to sell these securities.
The answer to the question about should it be more or less is a very personal choice. The way you should look at it is, you have financial responsibilities to your family. Taking a more aggressive approach to angel investors would limit your choices as a family in the near term. You need to see if you are willing to make those sacrifices right now. 15% allocation to angel investing means you will be deeply involved in this asset class and will be able to build a portfolio that is reasonably large at 30+ companies.
After 4 full years based on the above scenario, you will have a portfolio with approximately 12 companies (don’t forget you might have an early failure or acquisition), and you will have invested somewhere in the neighborhood of $200,000 to $250,000. Not coincidentally, We believe this is the minimum amount you should reserve for building an angel investment portfolio. Anything less than that amount and you won’t have invested in enough companies. So if you aren’t comfortable committing $250,000 to angel investing over a 4 year period, you might not want to start.
Let’s examine another scenario. If an angel builds a portfolio closer to your recommended range of 20+ companies where the investment pace is 6 new deals a year, the math works out to something like this. Assuming $25,000 for the initial round and allocating funds for follow-on rounds, an angel will invest over $1,000,000 dollars in a 4 to 5-year time frame. If you keep to the 5% to 10% of your overall investable net worth, such an angel should have an overall investment portfolio of between $10,000,000 and $20,000,000.