Angel Investing and Portfolio Management: How do Angel Investors Effectively Balance Risk and Returns across Early-Stage Investments and Other Asset Classes?
By Mather Kipka ’25 Principal
Angel investing is inherently risky, with the vast majority of investments resulting in a loss of some, if not all, of the initial capital investment. However, with a well-diversified portfolio of startups, Angel Investors can realize returns that far outpace other asset classes. As with any investment, this risk-return dynamic must be taken into account when building a broader investment strategy and managing one’s entire portfolio of investments. So, what do industry standards and investment data tell us about portfolio management, composition, and diversification when it comes to Angel Investing?
Research conducted by the Center for Venture Research and the Angel Resource Institute spanning almost three decades indicate an internal rate of return (IRR) that ranges from 22 to 27 percent across sufficiently diversified Angel Investment Portfolios, significantly greater than that of common public equity investments including the Dow Jones Industrial Average, S&P 500 Index, NASDAQ, and Russell 2,000 Index, whose last 15-year IRR’s were just 9.4, 12.7, 9.8, and 7.7 percent, respectively. Angel Investing also displays a higher IRR on average than comparable private equity investments; the Bloomberg VC Index’s 15-year IRR is less than half (10.3 percent) of the return generated from well-managed Angel portfolios. The historical data is clear: Angel Investment can generate considerably more attractive returns than most, if not all other asset classes. But as the saying goes, there is no such thing as a free lunch. As a tradeoff to these attractive returns, Angel Investing inherently possesses a much higher level of risk that should be balanced with sufficient diversification and reasonable capital allocation.
A fundamental element of portfolio management is to diversify across multiple investments and asset classes to mitigate risk and overall investment volatility. This is especially important in the Angel Investing space, both in the management of an Angel portfolio itself, and for Angel Investing as part of a broader investment strategy. Analysis conducted by the Angel Capital Association of 278 Angel portfolios’ returns from 2000 to 2020 discovered that diversification not only drastically reduced the variability of returns of portfolio companies, but also increased the overall return of the portfolios in terms of median IRR. Angel Investment portfolios of five to ten companies experienced a median IRR that was three to four times higher, with only about a third of the variability of returns as portfolios of just one to five companies. Moreover, portfolios of 15 to 25 companies exhibited a 4.5 times increase in median IRR, with only one-twelfth of the return variability, again compared to portfolios of just one to five companies. Portfolios with greater than 25 companies performed similarly, though, suggesting that these improvements in median IRR and return variability tend to stabilize and remain constant past the 25-company mark. These numbers seem to make sense when considering the general distribution of returns within Angel Portfolios, that tend to be pulled upward with “grand slam home runs, not singles.” Generally speaking, the top decile of Angel Investments (in terms of IRR) typically generates 85 to 90 percent of the portfolio’s returns. For the Tech Coast Angels, an investment group based in southern California, the relationship was even more extreme: just eight companies out of 247 investments between 1997 and 2022 generated 77 percent of their portfolio’s returns, in dollar terms, including four investments that generated a return multiple of greater than 100x. Very generally speaking, investments in the healthcare, technology, and biotechnology industries have the potential of generating such high returns due to their innovative nature and strong continual growth, however, emerging subindustries such as FinTech and AgriTech have shown increased levels of Angel Investment in recent years, suggesting their attractiveness to investors and potential for heightened future returns. Regardless of industry, though, the upside of Angel Investing is clearly very attractive, yet difficult to realize without a broad portfolio of companies. But, even with a portfolio of 25 or more investments, the distribution of returns is far, far greater than even Venture Capital investment, and especially Hedge Funds, Mutual Funds, and ETFs and market indexes. So, in terms of a broader, holistic investment strategy, how much of one’s portfolio should be allocated to Angel Investments?
Many investment professionals suggest that Angel Investments represent no more than ten percent of one’s overall investment portfolio, while others recommend a range of ten to 20 percent as a general rule of thumb. This is, of course, if Angel Investments are present in one’s portfolio in the first place. Most angel investors are wealthy individuals with significant business experience, and it is important to note that Angel Investing may not be advisable, or feasible, for every individual investor. It is always important to consider one’s investment goal, timeline, risk tolerance, and personal net worth, among other things, when constructing an investment portfolio and allocating capital across asset classes. That being said, diversification is, generally speaking, an essential way to mitigate risk across one’s entire portfolio, and with specific regard to Angel Investments as well.
Mather is a junior from Peterborough, NH and is pursuing a double major in Analytical Economics and German. This past summer, he worked as an Assistant Property Manager for his family real estate office, after completing a Business Development internship with Cynuria Consulting in Washington, DC during the spring of 2023. On campus, Mather works as an Undergraduate Researcher focusing on sovereign bonds in emerging economies, and can often be found playing pick-up basketball in the Hamel Rec Center during his free time. Mather joined the Fund to learn the fundamentals of venture capital and private equity investing, and is excited to continue to build on his knowledge of the financial services industry.
