The Decade of the Angel Investor

This decade will be remembered as the decade of the angel investor, said Paul Singh, partner in 500 Startups.
He spoke to a gathering of angel investors and startup founders at Capital Factory in Austin Thursday night.
‘The number one mistake angels make is that they take the entire round,” Singh said. “One of the things we have to think about today is are we going to be the only suckers in the deal.”
Angel investors who put money into 20 deals have the greatest chance of getting multiple returns on their investment, Singh said.
“You will make the most multiples on your initial check,” said Singh. “But you will make the most absolute returns on your second one.”
It’s all about quantitative portfolio analysis and controlling risk, he said.
As an angel if you do five deals you might double your money, said Singh. Ten companies returns closer to a 1.7 times return and 20 deals gets a 2.3 return, he said. To get a three times return, an investor must put money into 123 companies, he said.
“The takeaway for angels is you shouldn’t get into this asset class unless you’re wiling to do 20 deals,” Singh said. “Do not get excited about any one company.”
Instead of doing due diligence on one company for six months and then writing a $1 million check, it’s better to turn that investment into 20 checks of $50,000 each, Singh said.
The analogy he uses is a casino. Old school venture capitalists walk into the casino and go to the roulette table and put their chips down.
“What I’m doing is going to the blackjack table, playing the minimum hand while I count the cards,” Singh said. “When I see a pattern I double down heavy.”
500 Startups provides initial investments ranging from $10,000 to $50,000 and second rounds or bridge rounds of $250,000 to $500,000.
“Bad bets fail fast,” Singh said. “Smaller check sizes force companies to figure stuff out quickly.”
Interesting phenomenon that happens on the backside of that is the best companies are raising lots of little checks and so you’ve got a lot of living dead out there.
“There are a lot of companies today that have raised too much money,” Singh said.
After 500 Startups writes a check, a company can raise on average $535,000 within 30 days.
But most founders don’t come to 500 Startups for money or that initial check, he said.
They want to tie into 500 Startups’ network. They can get founders access to the guys who run the Facebook API. They can resolve a Paypal problem within 8 minutes at 2 a.m.

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