Angel Investing: What’s the Magic Number?

Note: This article is the fifth in an ongoing series for angels new to investing. To learn more about building an angel portfolio, download this free eBook today Angel 101: A Primer for Angel Investors or purchase our books at

Angel investing magic number of investments
Image by Andy Maguire

Almost every time I meet a new angel investor one of the very first questions I get is a variation of “Can I make any money investing in startup companies?”. I wish there was a quick, 30 second answer to this question, but there isn’t. This seminal question is at the heart of what new angels need to understand before they jump in. Before you can answer this question, you must understand the risks you are taking. So how do you mitigate some of these risks? First, you need to understand what it takes to build a diversified portfolio of startup companies.

Over the course of seven years focused entirely on angel investing, Christopher built a substantial angel portfolio with over 40 investments. So I’m guessing that he has some interesting answers to questions that relate to building an angel portfolio.

Q: Christopher, think back to 2009 when you started angel investing. Did you have any concept of how many investments you were going to make?

Yes, and no. I had a goal of getting very diversified, and I had a target total amount of capital I wanted to allocate to the angel asset class, and I knew I wanted to focus on first round check sizes in the $10K-25K range. But what I did not know, and could not have known, are three very crucial variables:

  • How many companies would merit follow-on investment?
  • How much follow-on investment would they require?
  • How much returned capital would I have to work with, and how quickly?

Regardless of the target angel allocation, those three variables are going to determine how many companies you can do.

Q: Why did you continue to invest in so many more new companies after you passed that threshold for diversification?

I did not have a specific threshold; the more investments you have, within the bounds of being able to manage them, the better. By manage them, I mean keep on top of them (Seraf helps a lot with that), keep current with their messaging and strategy, help them, have capital available to follow-on and be able to maintain a relationship with the CEO. There is probably an outside limit on the number of companies one can do that with, but for a full-time angel such as myself, who is passionate about the space, and energetic about putting in the time, that limit is pretty high - probably in the neighborhood of 50 companies.

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Q: Looking into the future, how many companies do you expect to have in your portfolio?

Every portfolio reaches a natural plateau at maturity and the exits begin to off-set the new investments. How many active companies that plateau represents is a function of the pace at which companies are added (particularly good companies - if you have lots of “fast failures,” that will bring the numbers down). Here is how the law of plateaus works: if you assume most companies take 5-10 years to reach an exit, and 50% of your companies fail in their first three years, as the companies in the portfolio age, eventually the rate of harvest will come into approximate equilibrium with the rate of replacement and your portfolio will plateau. These are just guestimates because every portfolio is a snowflake, but if you are investing at a pace of 2-3 companies a year, you will likely plateau at 10-15 companies, if you invest in 4-6 companies a year, you will plateau in the 15-30 range, and 7-10 companies a year, you will probably plateau in the 30-50 company range.

Q: If you were giving advice to a new angel investor, what do you think is the minimum number of investments needed to have any real diversification in their angel portfolio?

You might get a lot of nice little wins along the way, but the majority of your returns are going to come from a tiny fraction of your investments. Massive wins are really rare, no matter who you are, and no matter where you are. Given that you are relying on big, rare wins to power the bulk of your returns, it stands to reason that you want to maximize your chance of hitting those. Being good at picking great companies is important, helping your companies succeed is important, and following on in your early breakouts is important, but at the end of the day, the most influential factor is having enough mathematical chances to even be in a big winner at all. If you invest in 10 companies you have 5 companies that might be big. If you invest in 20 companies you are fishing out of a pond of 10. And so on. So as far as I am concerned, baseline absolute minimum diversification starts at 10 investments, but this is a case where more is definitely better (again, subject to your ability to manage them as noted above.) Analysts have done Monte Carlo simulations that show that median returns increase substantially with portfolio size. So, while your mileage may vary, it is pretty safe to say that 20 companies is better than 10 and 50 is better than 20.

Q: What is a good pace for making new investments on an annual basis? At that pace, how many investments should an angel expect to have in a mature portfolio?

I think the best thing you can do is to keep the pace of investments relatively high as you are starting out so you can get up the diversification and learning curves quickly, but keep the average first round check size modest so that you have the capital to sustain your pace over the long term, including follow-ons. Follow-on investing is a really big factor in capital use. Getting more money into winners as they start to break out is critical to good returns. Not all of your companies will merit follow-on investing and the amount of capital required will vary, but a good rule of thumb is to set aside one dollar in follow-on money for every dollar of first round investment. You want to pick a pace that allows you to keep adding companies, covering your follow-ons and getting into the experienced end of the learning curve where you are presumably going to make better decisions. When you net it out, if you have the capital, and the time, and the quality deal flow, a good pace of investments is probably around 5-7 deals a year. If you have less time, less capital, and less deal flow, I still think you should be shooting for 3-4.

Q: How much time does it take to be a successful angel and build a successful portfolio?

It really depends a bit on where you are located and what angel investing approach you use. The short answer is that if you are not:

you are going to need to put in a very significant amount of time to build a successful portfolio on a risk & return adjusted basis. By that I mean 30-40+ hours a week. And even if you have those two advantages, you’ll probably see benefits from putting more time in compared to less. I don’t know many serious investors who put less than an average of 10-20 hours a week into it.

And it stands to reason. Angel investing boils down to relatively time-intensive activities:  

  • Finding interesting companies,

  • Investigating whether they might be good investments,

  • Getting a deal done, and then

  • Tracking and helping the company succeed.  

If you are working alone, all of those things are going to gobble up the vast, vast majority of your professional time, particularly since you are typically active with multiple companies at once. And this is doubly true in a quieter ecosystem where there is less entrepreneurial activity - fewer companies, fewer events, fewer universities, etc.

Yes, there are certainly models of old school angel investing where, as a by-product of your career or retirement, you occasionally just happen to meet interesting people along the way, and you just toss them a few bucks, and maybe a couple of them pay off. Perhaps over a 25 year period you might do 5-6 of those kinds of investments in total. Nothing wrong with that if you accept that with a portfolio that small you are probably taking on more risk than you need to relative to diligently constructing a properly diversified portfolio.  

There are modern ways to try and supplement the opportunistic “solo approach” in a more time efficient manner by finding companies online and investing remotely. And this certainly can be a good way to bump up the quantity of companies in your portfolio for a modest investment of time. Depending on your ecosystem, it might be the only way to access very specific types of companies you would otherwise never see.

But this online remote approach does have its risks, and they can be serious. Chief amongst them is the fact that if:

  • You don’t get to spend face-to-face time with the team,

  • You cannot be certain it is really as special as the hype would lead you to believe, and

  • You cannot really build a relationship and put in the kind of human capital you could with a local company.  

If team is the most important element of a deal (as I and many other investors believe), then not evaluating the team up close over time is a big gotcha. Post investment, you can, in theory, still help out a little by making introductions, but the reality is that “out of sight, out of mind” tends to set in with these long-distance relationships, and it is very hard to get involved and de-risk the investment.  

If you aren’t adding that value, then who is? Is there a lead investor doing it? Who is sitting on the board? These are the kinds of questions that dog you when you invest remotely, and they all boil down to making an already risky type of investment that much riskier.

If you live in an ecosystem rich with entrepreneurial activity and other investors, you can team up with other angels to allow you to build a much bigger portfolio in the same amount of time, or the same sized portfolio in much less time. For example, working with a local angel network can allow you to:

  • Attract deal flow in a very systematic way,

  • Share the load of evaluating companies,

  • Work together on deal terms and filling a round, and

  • Share the load of supporting companies with board service, networks, advice and introductions.  

If you want to build a carefully-constructed portfolio that is big enough to reach the level of highly probable positive returns, it is hard to imagine doing that outside of a highly functional group operating in a busy entrepreneurial ecosystem. (For additional context on this trend toward angels working together, here’s some discussion about how this trend toward networks fits into the changes in the angel ecosystem.) In our large and well-organized group located in the startup mecca of Boston, we have many professional investors with very large and attractive portfolios (of 15-25 companies) who are averaging approximately 10 hours of angel work a week. That is the power of working together.

Q: What about angel funds as a way to build diversification and manage my time commitment?

Angel funds can be a great way to get more diversified for a manageable amount of time. If it is a really well-run fund that has good processes and good deal flow, that can be a great approach. However, funds typically come with either a management fee or a  “carry” on the profits, or both. Those fees can eat into your returns in a risky asset class where better than market returns are required for the risk assumed, so you will want to look for reasonable fee funds and be sure you get good value for your dollar. You probably also want to stick with funds run by experienced managers. We’ve done an entire book and huge article series on the topic of running funds, and suffice it to say, it is definitely not easy to do well.

A more subtle consideration with funds is that they can take some of the human capital element out of angel investing. By definition, in a fund, you are somewhat more passive than the direct investor.  If you are less involved with the companies, (1) not only might it be less fun, educational and rewarding from a psychic returns perspective, (2) you might be slightly less able to de-risk your investments with oversight, advice, board service, introductions etc.

Of course it is not all extremes, and there are some excellent lower fee funds and some “get involved” local angel funds that can work very well and might be worth checking out. One model employed by angels who are primarily direct-investment network angels is they stretch their time and dollars by putting a little money into a good low cost fund as a way of supplementing their diversification in one dimension or another. That is something I do, for example, with a west coast fund for geographical diversification and an east coast specialty fund for vertical diversification.  

Q: You spent most of your career in the Enterprise Software industry. Do you make most of your investments in Enterprise Software companies?

No. The industry you know is certainly your comfort zone and your zone of greatest self-sufficiency, but the beauty of angel investing is that, unlike making a career bet where you have to bet it all on one particular job, you can diversify yourself into different industries by collaborating with other investors who have complementary skill sets. So I definitely invest outside of enterprise software. The closer a company is to that kind of business, the easier it is, and the farther away it is, the harder it is, but my portfolio is well over half outside of enterprise software. One note of caution here is that some industries like life sciences are so radically different due to regulatory issues, IP issues, company development paths, and exit dynamics, that if you don’t have a background in it, you really need to work closely with expert co-investors for a long time before you can do it on your own. For example, although I have been looking at a lot of life science deals for the last 5 years or so, and I have invested in a few, I feel that I am still years away from being able to do that kind of investing competently on my own. A second note I would make, this time a positive one, is that if you are fascinated in an area and tend to think about it and pay attention to it in your free time, through general reading, networking and other activities, you can greatly shorten the time it takes to get up to speed in that area.

Q: How confidently do you invest in companies that are outside your area of expertise?

That’s a trick question! Start-ups invent new and innovative ways to fail every day, so I am never objectively confident in any investment I make. You need to have the humility to realize you are going to get burned on a number of them. But that said, many of them fail because of familiar and recognizable issues, and with practice you can spot those issues looming. Also, the quality of the team is a universally important driver in all companies, and some aspects of that team evaluation have common denominators across all industries. So there are some obvious issues you can learn to avoid, some key attributes you can learn to look for, and some personal industry experience you can rely on. As a result, as I have become more experienced, I have grown a bit more confident, or at least a little more trusting of my gut.

Want to learn more about building an angel portfolio and developing the key skills needed to make great investments? Download Angel 101: A Primer for Angel Investors and Angel 201: The 4 Critical Skills Every Angel Should Master, or purchase our books at