One of the most common threads of conversations with investors I work with involves me describing in detail two or three investment opportunities, explaining why my personal opinion is favorable, then hearing the question, "great, so which one are you personally investing in?"

Nearly every time the answer is "all of them."

The most obvious reason for this is that, as a matter of principle and professional style, I personally invest in the opportunities I share with other investors, unless otherwise specified.

The second reason, and the broader reason for why I am often sharing multiple opportunities at a time, is that I believe very strongly in creating a broad portfolio basket when doing early-stage investing.

There is a significant and credible body of research showing that angel investors with a portfolio of at least 25 companies have far higher long term returns than those with less, and the effect is compounded by multiple standard deviations when an angel investors' total portfolio is under 10 opportunities.

Simply put: volume pays, provided its allocated to well-vetted opportunities.

I believe that it's important for angel investors to shoot for these appropriate volumes even if it means reducing their per-opportunity upside. Meaning: if an investors' annual early-stage investment budget is $200,000, as an example, it is better to invest $20,000 each into ten well-vetted opportunities than $50,000 each into four.

Of course, it is critical not to reduce selectivity while increasing volume, because investing into crap never helped anyone, which is why the research also shows it makes sense to invest in a basket of different industries and regions. The experience of certain individuals and funds with significant deep industry expertise and brand equity notwithstanding, it is often hard for generalists to find over a dozen high quality deals in one industry and region in a short period of time.

However, within that broad basket, personal experience has shown me it's important to maintain some important standards:

1) Any company you invest in should come from a well-vetted party; either a well-reputed angel network or syndicate you belong to, or a fund you work with, and you should invest alongside others you trust. Research shows angel investors investing as part of a group and-or alongside a trusted entity have far better returns than those investing alone.

2) The founding team should have the right mix of talent, experience, and knowledge to succeed in their particular industry

3) The brain trust around the company should be impressive, with the ability to push the right buttons at the right moments both in terms of internal company strategy and external relationships

4) There should be a large opportunity in play and an important unique angle to exploit, either within the technology itself or in the approach to the market

These standards are crucially important, and will help keep portfolio quality up even as the basket size increases, which is ultimately the recipe for success at the early-stage.

Published on: Sep 8, 2016
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