Investor success in angel investing is about building investment portfolios, and that’s a long-term proposition. Many of our MAA members have invested in more than one of the companies in the current MAA portfolio. Building portfolios is an ingredient in mitigating investment risk. A typical portfolio might be built over 4 or 5 years and contain seven or more companies. There will be winners and losers. We do know that the average annual return on a portfolio can be 25 percent or more.
One way to approach angel investing is to decide how much you wish to invest in a given year. Say you decide to invest $100,000. Remember, we’re talking risk here. Half of these ventures fail completely, about 20 percent return the original investment, another 20 percent return 2X to 3X the investment, 9 percent return 10X, and – hang on tight – 1 percent return more than 20X. So, if I plunk my $100,000 into a single company, there’s a 50-50 chance I’ll lose it all. However, if I invest $25,000 in each of four companies, I have a fair chance of beating the odds and reaping a return on my investment. Keep in mind, that while we examine these companies – aka, due diligence – the process is never perfect. Perhaps, you decide to invest $5,000 in each of five companies over the year; a $25,000 contribution to your portfolio. Ultimately, the goal is a portfolio that mitigates risk and generates returns.
We have several MAA members who seek to participate at modest levels well below the individual average of $37,000. That’s wonderful. It’s also why we offer syndications and regulation crowdfunding. If 10 of our MAA members each invest $5,000 in a syndication or crowdfund for a single company, they participate in a meaningful capital investment with possibility of meaningful returns, they build their personal portfolio toward mitigating overall risk, and they contribute to attracting additional deal flow to MAA. (If we don’t make deals, word gets out and we won’t attract entrepreneurial ventures.)
It’s important to note, that MAA has a formal screening process by which companies are first evaluated using 20 business criteria and then through the Pitch Review by which MAA members get to assess those selected to move forward. Those companies passing muster are invited to pitch at one of our Angel Events and, if interest is shown, are subsequently invited to “due diligence” meetings with MAA members. Since its founding, MAA has been approached by more than 150 businesses of which 32 passed the BP evaluation and pitched to us. Of the 32, five (one in six) received investment. (Two of those 32 are currently being seriously considered for investment.) Nationally, angel groups invest in one out of 40 companies, so our one in 30 compares quite favorably.
Bottom line? If an MAA investor invests in three companies each year and the typical ROI is achieved in 4 to 5 years (plus allowing 50 percent for failures), at the end of 4 years each MAA investor should have a portfolio of six to eight reasonably viable companies and begin to see meaningful ROI. So, to paraphrase a famous advertising line, what’s in your portfolio?