I recently wrote an internal memo that sent to all Tundra Angels investors.

One of the major things that I want all Tundra Angels’ members to understand is how investors find financial success in venture investing. 

The audience is our group of angel investors, but it certainly applies to all venture capital investing. I hope that you find it helpful but also hope you get an inside look at how venture investors think about investing in startups.

The Memo:

A major temptation for angel investors is to consider investing in a company and try to answer the question, "Is this company the one that is going to win?" However, I would argue that that is the wrong question to be asking.

As in any business, there are way too many factors in the path of success that trying to answer the “Is this company the one to win,” is an unanswerable question. Plus, trying to answer the question puts way too much undue pressure on investors. Importantly, trying to pick the winners may actually cause an investor to not invest in anything, or worse, invest in only a small set of companies, which is a very suboptimal strategy to generate financial returns. 

✅ Thus, angel investors should not pick the winners, but rather play the numbers. ✅

The importance of diversification is one of the fundamental premises in angel investing. In a study done by the Angel Capital Association, it states that “Over half of early-stage investments typically fail to return any capital, with the top 10% usually returning 85-90% of all the cash proceeds. The game is won on “grand slam home runs," not “singles."

Investing in the top 10% is impossible by the “pick the winners” strategy. It is ONLY possible by intentional diversification and putting together a diversified portfolio of startup companies over time. 

I will also tell you that as the angel group manager, the members/investors in Tundra Angels that are putting themselves in the best position to generate financial returns are the ones that are invested in nearly every single opportunity. Why is that? 

To generate financial return, it’s ultimately not about the strength of our acumen to foresee the future. But rather our ability to systematically diversify. 

✅ Successful angel investors move to a world that we cannot control (trying to predict which companies will actually win), to a world that we can control - systematic diversification. ✅

In that way, the decision to invest or to not invest in a company, ideally becomes a lot easier and with much less pressure on you as an investor. 

How Diversified Should I Be? 

Let’s look at the data to answer this question. 

In the same study by the Angel Capital Association, they noted that between 1997-2022, Tech Coast Angels, a California-based angel investor network, had 247 “outcomes” - which includes shut downs and exits. Of those 247 outcomes, the study notes that “8 companies representing 3% of the outcomes produced 77% of the dollars returned.”

Granted, these are investments made over the course of 25 years. However, it speaks to the importance of prolific diversification. 

Get comfortable that some capital will be lost. You won’t lose more than you put in. 

But you can gain a lot more than you put in. Every investment is an access door to potential upside.

✅ An angel investor’s job is to maximize those access doors to potential upside through strong diversification. ✅

Don’t Pick the Winners. Instead, Play the Numbers.

Click here to access the rest of the newsletter articles.

Here are some of the recent ones!