![\"Why](\"http:\/\/smallbiztrends.com\/wp-content\/uploads\/2017\/05\/shutterstock_437844922.jpg\")
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The typical angel investor has a portfolio of just seven companies, the American Angel Survey<\/a>, an effort to gather information from nearly 1700 accredited investor angels, reveals. The 75th percentile is just 15 investments, and the maximum portfolio is only 106 investments.<\/p>\n The small portfolios of typical angel investors surprise me because numerous studies of angel investing show portfolios that size are too small to ensure that the investor will generate an acceptable financial return at minimal risk<\/a>. For instance, Monte Carlo simulations of angel investment return data indicate that investors need to build a portfolio of more than 50 investments to have a greater than 90 percent probability of a two times return on investment. In this week\u2019s column, I will try to explain why angel investors build small portfolios.<\/p>\n Eric Ver Ploeg, a former venture capitalist, who now puts together startup investment syndicates on Angellist says, \u201cMost angel investors are investing for non-pecuniary reasons, so they rationally don’t care about optimal portfolio sizing,\u201d he says.<\/p>\n Dave Lambert, a partner at Right Side Capital Management, a pre-seed stage investor, concurs. \u201cMost have some other utility factor that is more important to them, whether they are aware of it or not,\u201d he says. \u201cSome specifically want smaller, concentrated portfolios because they enjoy working closely with the entrepreneurs. Some specifically just want to invest locally so that they can give back to their community,\u201d he continues.<\/p>\n If investors are not trying to maximize their financial returns, then there is no reason for them to have large portfolios. Growing a portfolio is a way to remove risk, while generating a return. Lambert says, \u201cIf you consider that most angels don\u2019t invest in a manner that maximizes their expected return<\/a>, it\u2019s not that surprising that even a smaller percentage operate in a manner that optimizes their risk\/adjusted return.\u201d<\/p>\n Morris Wheeler, an investor with Drummond Road Capital says, \u201cmost angels don\u2019t understand the concept of standard deviation. They think that if they put more money into fewer investments that they will have an opportunity to make more money. I can’t tell you many times I have heard people say, if I only put $10,000 into an investment I will get so diluted over time that my investment will be worth nothing. They simply don’t understand the difference between percentage dilution and value dilution.\u201d<\/p>\n Another experienced angel says, \u201cThey are unaware of the Law of Large Numbers.\u201d<\/p>\n Wheeler offers a third reason for small angel portfolios: limited time. He says, most angels \u201cinvest as a \u2018hobby.\u201d They don\u2019t have the \u201cpipeline to make that many investments\u2026 [and] can’t do the due diligence \u2026 [or] monitor that many investments.\u201d<\/p>\n Venture capitalist Tim Schigel says, “People who enjoy working with startups … cannot possibly keep up with over 50 companies. They may actually enjoy getting their hands dirty with fewer companies.”<\/p>\n Marianne Hudson of the Angel Capital Association explains, \u201cMost education I\u2019ve seen has also recommended building your portfolio over time, say one to three companies per year\u2026. Many \u2026 angels \u2026 are in the early stages of building their portfolios.\u201d<\/p>\n Time affects angel portfolio size in another way as well. Because time is limited, some angels find it better to focus on selecting the right start-ups rather than on finding more of them to invest in. As Ver Ploeg says, \u201cFor an angel it is rational not to increase their portfolio size if doing so means spending less time evaluating and rejecting companies.\u201d<\/p>\n Former public equities hedge fund manager turned early stage fund manager, Larry Bernstein says, \u201cAngel investing is just the most natural thing ever to bias otherwise smart people into overvaluing their own opinions on predicting the future.\u201d Many angels think they don\u2019t need a large portfolio because they know which new companies will succeed<\/a> and which will not.<\/p>\n An experienced angel offers another aspect of the psychology of angel investing — the horror of experiencing losses. He says, \u201cLemons ripen faster than plums: I\u2019d guess that every serious angel I know recorded several losses prior to reaping their first positive exit.\u201d Many angels see the money they have lost on bad deals and decide not to make further angel investments.<\/p>\n Discussion<\/a> Photo via Shutterstock<\/em><\/small><\/p>\n This article, “5 Reasons Angels May Have Small Portfolios<\/a>” was first published on Small Business Trends<\/a><\/p>\n The typical angel portfolio has 7 companies, too small to ensure an acceptable financial return at minimal risk. Here’s why angels have small portfolios.<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[26],"tags":[],"class_list":["post-18055","post","type-post","status-publish","format-standard","hentry","category-vc-angel-capital"],"_links":{"self":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts\/18055","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=18055"}],"version-history":[{"count":0,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts\/18055\/revisions"}],"wp:attachment":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=18055"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=18055"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=18055"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Why Angels Have Small Portfolios<\/h2>\n
Making Money Isn\u2019t Their Goal<\/h3>\n
They Don\u2019t Understand Statistics<\/h3>\n
They Haven\u2019t Got the Time<\/h3>\n
Angels Overestimate Their Ability to Pick Winners<\/h3>\n
They Get Scared By Their Losses<\/h3>\n
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