In the celestial sphere of the investment world, angel investors are often seen as the guiding stars for startups, musicals, and film – providing not only capital but also guidance, mentorship, and access to networks that can be crucial in the early stages of a venture’s life cycle.
But like the constellations in the sky, the secret to maximizing the potential of these investments may lie in the number and diversity of the stars you align with – in other words, the more angel investments you make, the higher the potential for a return.
Understanding Angel Investing
Angel investing is a subset of private equity, where individuals fund a business start-up or venture, usually in exchange for convertible debt or ownership equity.
Investors like the members of The RainMakers Collective fill the gap between the small-scale financing provided by family and friends and the more extensive venture capital funding.
Angel investments are high-risk, but they can offer high rewards, including financial return, personal satisfaction, and the chance to support innovation and entrepreneurship.
Traditional angel investments usually entail an investment in a startup.
We aim to disrupt the angel investing space by including alternative assets such as theater, film, and collectibles.
The More You Make: The Law of Large Numbers
The law of large numbers is a principle of probability that suggests that the performance of individual investments can become more predictable as the size of the investment portfolio increases.
When applied to angel investing, this law suggests that while one or two investments may fail or only provide modest returns, a larger number of investments increases the chances of landing a ‘home run’ that can cover the losses of other less successful ventures and still provide a substantial return.
7 Reasons to Make Multiple Investments: Portfolio Theory in Practice
Forgive us for getting a little technical here. Modern portfolio theory (MPT) argues that investing in a wide range of assets is the best way to maximize returns for a given level of risk.
By creating a diverse angel investment portfolio, investors can potentially enjoy several benefits:
1. Spread of Risk
By investing in various investments across different industries and stages of development, an angel investor can mitigate the risk of any single investment. If one investment doesn’t do well, the successful growth of others can offset the loss.
2. Potential for Higher Returns
With more investments, there is a greater chance of investing in a production or company that could become the next unicorn or blockbuster hit, delivering returns that could dwarf the sums invested in other ventures.
3. Learning Curve
Every investment is an opportunity to learn. More investments mean learning about different markets, business models, and what makes a venture succeed or fail, improving the investor’s understanding and decision-making skills.
4. Increased Deal Flow
As you invest in more companies, your reputation as an angel investor grows, attracting more pitches and opportunities from better-quality startups. This creates a virtuous cycle where success breeds more potential for success.
5. The Power of Syndication
One of the ways angel investors can increase their number of investments without proportionally increasing the amount of capital at risk is through syndication. By pooling resources with other angels, investors can participate in more deals with smaller individual capital outlays, leveraging a wider network of expertise and insight while diversifying their portfolios.
6. Balancing Quantity and Quality
While increasing the number of investments can lead to higher potential returns, it’s essential not to sacrifice quality for quantity. Due diligence is still a crucial part of the investment process, and spreading oneself too thin can lead to missed red flags or oversight in the due diligence process. Smart angels strike a balance by setting clear investment criteria, leveraging their networks, and sometimes co-investing with more experienced angels in The Collective.
7. Tax Considerations and Incentives
In many regions, governments offer tax advantages to angel investors to encourage investment. These incentives can reduce the practical risk of investing. More investments can mean more opportunities to take advantage of such incentives, thereby increasing the post-tax potential return.
Increasing the number of angel investments can statistically raise the potential for higher returns, but this should be done with strategy and prudence. It’s about finding the sweet spot where the breadth of investments does not dilute the quality or exhaust the resources — financial or otherwise — of the investor.