Several friends have told me angel investing is not a good way to make money. If you can do the YC/Ron Conway strategy that is one thing, and if you just want to give back that's another, but doing it at my level is a waste of money.
I do want to give back, but I also want to make money with my angel investing. So I've been thinking a lot about strategies to employ to fulfill both goals. To that end, I've been creating spreadsheets that I'd like to share with you.
First, check out the Angel investing portfolio scenario planner (Google doc spreadsheet). To get an editable copy, select 'Make a copy...' from the File menu (or Ctrl+Shift+S).
This spreadsheet shows you the internal rate of return (IRR) of a fictional set of 10 investments of $25K. Really the amount per investment doesn't matter.
The investments have 5 year time horizons, i.e. the payout happens in year 5 (row 15). And each investment outcome can fall into 5 buckets: lose everything, return money, medium, medium high and high. The payouts of these outcomes are in column B, and the % breakdown (how many investments are in each bucket) are in column C.
If you play around with column C you can allocate different amounts of investments to each bucket and see the effect on IRR (G15). If you want you can also mess with column B to change the payouts of the buckets.
The following are some of my takeaways. I'd love to know yours.
- My ambitious goal is for a 30% IRR. The default scenario is one way to get that, which is like the 1/3, 1/3, 1/3 a lot of good investors report. In this case, it's 40% lose everything, 30% return money, 10% medium, 10% medium-high and 10% high.
- The return money bucket really doesn't influence overall IRR that much. If you change the default to 70% lose everything, i.e. take all the return money % and move it to lose everything, it only changes the IRR by about 2%. It certainly matters psychologically and it may free up more money to invest, but in this static scenario it doesn't really move the needle.
- If you change the outcome of the high bucket (B11) much higher, you can see what it is like to invest in the next Google. You can also see that if it is just one of your investments that's fine, i.e. the oft mentioned 1 in 10 home-run strategy.
- If you want 30% IRR, you really need to get a high outcome in there. This leads me to again wonder whether I should only consider events where I can see a realistic path to that high exit going on what is put in front of me.
- The time horizon really does matter a lot. I added rows 16 & 17 to show the difference between a 5 year time horizon vs a 4 and 3 year one. VC-backed companies have significantly later exits on average. These scenarios make me wonder if I should really be looking at companies (at least in part) that could make it without VC.
