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The Portfolio Theory of Angel Investing

Why Every Angel Needs to Invest in at Least 20 Companies

WHEN PEOPLE HEAR about the 25 percent annualized rate of return that active angel investors obtain, they assume that there must be some secret involved—perhaps an old-boy network of hidden links that connects angels to brilliant entrepreneurs and tech innovators, or a mathematical algorithm developed by some genius at MIT that helps angels identify and invest in the businesses that are guaranteed to be the Apples, Googles, and Facebooks of tomorrow.

In reality, there are few secrets about the investment world, including the world of startups. But there are some little-known truths that serious startup investors (both angels and venture capitalists) take for granted, and to which most people—including entrepreneurs themselves—are oblivious. These deal with the fundamental nature of the industry, and you need to completely internalize them if you are going to be successful at investing in startups.

Truth 1: Most Startups Fail

It's a message that most angels or venture investors could deliver to would-be entrepreneurs dozens of times a month—and that they would deliver were it not for the fact that they don't want to burn their bridges or ruin their reputations for being nice guys. The message runs something like this:

I'm sorry, but your business idea simply doesn't make sense. It shows zero understanding of startups in general, your market in particular, and basic economics. Even ...

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