The best chance of success for angel investors is to make 20 small, early investments and follow on with the winners. How can you hope to do that in Australia?
Angel investment is a wonderful opportunity. You get to make a huge impact on a team of people, enjoy the thrill of creation and also share in the enormous financial returns. The first two are definite, the last one is unknown.
Some startups succeed but many do not. Backing a single startup is risky with all your eggs in one basket. A portfolio approach gives you a spread of that risk across multiple teams, ideas, markets and outcomes. The recommended spread is 20 companies to give yourself the best chance of a good return.
When one of the startups is working well and growing, you should have the right to keep investing to reduce dilution and maybe increase your stake. That sounds OK, but there are other challenges. In Australia we don’t yet have the quality deal flow to be able to find 20 companies to invest in over a 5 year period. Also, you won’t have time to be able to help 20 companies so their chance of success goes down a little.
There is a better way. Pooled investing upfront and then follow on with the winners. At the Australian Angel Investors conference a few weeks ago three excellent overseas speakers from Vancouver, Los Angeles and Kuala Lumpur all highlighted the importance of having pooled investment structures.
Let’s do some maths on two options. Firstly direct investing alone. With a minimum investment of $50,000 in 20 companies that’s $1,000,000. Let’s assume you follow on invest $100k into 5 of them, that’s another $500,000 for $1,500,000 in total. Assuming an average 5x return on your money across the 5 (some might be 10x and some may still fail) that’s a little over $3m returned or 2x in total. Not bad.
Now let’s take pooled investments, with a $100,000 into an early stage incubator like Pollenizer to create 20 companies in 5 years. Assuming again you follow on with 5 direct investments of $100,000 that’s $500,000 for a total of $600,000. On the same average return of 5x on your money on the 5 winners you have $2.5m returned plus let’s say 2x return on the Pollenizer investment (because it is pooled). That’s $2.7m returned. That’s 4.5x return.
But, in reality the second option is much better because it is at least possible given the deal flow coming through Pollenizer. Plus, the chance of success is actually more likely because of the time and methodology that Pollenizer invests across the portfolio.
This is obviously a completely biased view and one that’s both selfish and selfless. It’s selfish in that Pollenizer is currently raising capital from investors. But part of my goal with this raise is to bring another 100 or 200 investors into the world of startups. It provides a way for people to make their first technology startup investment in a structured way, as a part of a bigger group, with education and support along the way. The end result may be follow on investment into a Pollenizer startup, but it also should be 10x investment into other startups. That’s fine. That’s great in fact. We are 10% along the journey of creating a world leading technology industry and whilst it’s growing according to Moore’s law it’s only doing so because good people are supporting it aggressively. And this is a part of it.
More good reading
Paul Singh on Angel Investing: