Considering all of the research I did before deciding to become an angel investor, I am not sure how I missed the ubiquitous advice to diversify one’s portfolio. In fact, I thought that just investing in a couple of deals would bring enough diversification for me. It wasn’t until I had already begun my training that I learned that “a couple” of angel investments should really be “10 or more” for a thoroughly diverse portfolio.
Yet, this realization is the No. 1 thing I am glad I didn’t know before becoming an angel investor: the need for diversity within my angel investment portfolio.
When I decided to become an angel investor, I enrolled in the Pipeline Fellowship training. I joined a cohort of 11 awesome women, and we met monthly for a couple of days at a time to learn about angel investing and make our first investment together as a group.
I remember sitting there with my Pipeline Fellowship cohort listening to Susan Preston, angel investor and board member of the Angel Resource Institute, talk about crafting our future angel portfolio. My ears perked up when she told us that we needed to have at least 10 (gasp!) companies in our portfolio. Furthermore, we needed to be prepared to re-invest in each of our portfolio companies in future rounds. I did the math in my head, and started to doubt whether I could mentally do this.
Portfolio diversification is a cornerstone of investment advice, and within asset classes —especially risky asset classes — diversification is key. There is a lot of research out there recommending portfolios of 10 companies, and some research showing that having even more is better.
While Preston’s advice made good sense, I am glad I didn’t hear it before entering angel investing. It would have added to the many mental barriers, and the implied capital commitment would have been daunting at a time when I wasn’t even sure how committed I was to becoming an angel investor.
Many women meet the qualifications to become angel investors, but fewer do because mental barriers hold them back. There are about 58,000 women angel investors who were active last year (about 19 percent of a total of 300,000 angels), yet there are more than 9 million households with a net worth greater than $1 million (not including primary residence).
The truth is that creating a diversified portfolio takes capital plus sufficient deal flow. Assessing and achieving both of these elements through the following three steps will help you tackle the diversification mental barrier.
Reassure yourself that you can, over time, deploy enough capital.
Calculate your net assets and allocate 5 percent to 10 percent to alternative assets, such as angel investments.
Start slowly (but start!).
The Pipeline Fellowship purposely starts out with a small commitment from each future angel to invest $5,000. That is a “mentally manageable” first investment. Making that first investment is key, so having opportunities to invest small amounts makes it easier. Many angel groups allow you to invest with a low minimum as long as you invest a certain amount over time.
Consider portfolio diversification through a fund.
There are many small angel group funds that can give you instant access to a portfolio of companies. You will also get the added benefit, in most cases, of learning from the other investors and understanding the investment process. Listening to investors talk through their investment strategy is a great way to get more involved and to learn.
Though I am glad I didn’t think about the need to diversify my angel portfolio before starting my angel investment training, this knowledge shouldn’t be a deterrent. Don’t let this — or any other mental barrier — hold you back from becoming an angel investor.
What kind of mental barriers are standing in your way of becoming an angel investor?
Barbara Clarke is a member of the DailyWorth Connect Program. Read more about the program here. She is also an angel investor in DailyWorth. You can find a full list of Clarke's angel investments here. This article is not investment advice, nor is it a solicitation to buy or sell any shares.