David Weisburd here – serial entrepreneur, co-head of venture capital at 10X Capital, and the newest member of the Angels & Entrepreneurs advisory board.

Five years ago, my parents decided that they also wanted to start investing into some of the top startups in Silicon Valley. They were beginners, and needless to say, I had plenty of advice to share.

Since then, they’ve been investing alongside me. So far, they have had quite a good run.

Today, I want to share with you the advice that I’ve given my parents on how to achieve great returns as an angel investor – and most importantly, how to do so in a predictable manner.

These are the tips I wish someone had shared with me when I was starting out. Of course, I’m no longer a beginner, but I revisit these rules every single week and consider them as I make any new investment.

Continuing to follow these tips has allowed me to separate the winning investments from the duds. Let’s dive right in.

Tip #3: Diversify, Diversify, Diversify

In the public markets, wealth managers tout the benefits of diversification. In reality, the mathematical benefits of diversification into public assets starts to max out at around 10 different asset holdings. In your public portfolio it’s much more important to diversify among asset classes than among individual stocks as public stocks tend to be highly correlated.

Power-Law Returns:

A system in which the lion’s share of returns come from a very small proportion of the total investments made.
In angel investing, the opposite is true – diversification among many different angel investments is the key factor for getting high returns.

Here’s why…

Angel investing is an asset class driven by power-law returns. That is because the upside returns are so great in any single angel investment, that a single company can make an entire portfolio return 10X or even 100X.

Why is that?

We mortals have a difficult time conceptualizing power-law returns, so let’s examine the implications of a 10,000x return on a single investment:

  • If you have a 10,000x return in a single asset, you can also have 9,999 companies go to zero and still return a 1x on your entire portfolio.
  • If you have a 10,000x return on a single asset, you can also have 99 companies go to zero and still have a 100x or 10,000% return on your portfolio.
  • If you have a 10,000x return on a single asset, putting in $100 returns $1 million, and putting in $1,000 returns $10 million!
That is why, when in doubt, it is important to put in a little bit of money into every single company.

Which leads me to the next tip:

Tip #2: When in Doubt, Don’t Pass – Invest the Minimum Instead

Don’t let ego get in the way of your next 10,000X return. Rather than deciding whether to invest $10,000 or $0, invest the very minimum – which in many cases can be as low as $100.

Obviously, this doesn’t apply for opportunities that don’t interest you at all. But if you’re on the fence, my defacto strategy is to invest a small amount.

Tip #1: Follow the Smart Money

Due Diligence:

A fully comprehensive appraisal of a business undertaken by a prospective investor, in order to verify its historical performance and future commercial potential.
Angel investing allows you to do something quite unique – and that is to invest at the same valuation as top-tier investors who have spent hundreds of hours diligencing a company.

It takes a minimum of 10 years to become a great investor. In order to do so, you must become comfortable following top-tier investors who have put in the work determining what makes for a great company and great investment.

The need to “let go” and defer to highly competent professionals can’t be understated for two reasons:

1) Understanding the difference between a bad company and a good company can be learned within a year, but learning the difference between a good company and a great company (a potential 10,000X) takes decades.

2) Lead investors often have access to 10 times more data and management interaction than the typical angel investor.

Do not overthink it… and do not allow your ego to talk yourself out of a great investment.
These three tips are what I’ve hammered into my parents since day one, and if early indicators are to be believed, their portfolio will outperform 90% of professional venture capitalists – and with a little luck, may even land them into the coveted top 5% of professional investor territory.

That’s not bad considering my mom (a nurse) and my father (an engineer) spend less than two hours a week on their investments…

With the right tools, anyone can invest like the pros do.

The key is to have a system and stick to it.

I’ll be back soon to share the three signals I look for in an early-stage startup.

Very best,

David

Comments

38 responses to “The Angel Investing Advice I Give My Parents and Friends”

  1. David, The 3 rules you shared are so helpful! I’m new to the Angel Investing space and although rule #1 and #3 I have down, I was a little wobbly on rule #2. Your insight is very helpful here! I follow Neal pretty much to the “T” (there’s a couple deals I’m in he has not covered but I try to minimize me “going off the reservation”). One beginner topic I’d love to have you cover in the months ahead is how exactly do exits work (whether via acquisition, IPO, etc). How will I be notified, will shares just appear in my brokerage account, etc. Basic stuff but basically revolves around how I collect funds from years earlier investments. The more examples and details the better. Many Thanks!

    Reply

  5. I am not a American but an Asian living in MalaysIa. Can I participate or invest in new start up companies following advices from The Start-Up
    Investors.

    Please advise. If the answer is yes I can participate, how do I go about it.
    Your quick reply will be greatly appreciated.

    Thank you.

    Reply

  9. The math is brilliant. A light bulb went on in my head. It makes so much sense, now. Great content. I can’t wait for the next article. I am loving pre IPO investing!

    Reply

  10. Thank you so much for this deeply informative article. It sounded like a personal letter addressed to me. Thank you.

    Reply

  11. I totally love the advice you’ve given. I’m new at investing and it’s very confusing to me. I joined angels & entrepreneurs a while ago, just recently got an account set up and deposited $200 in it for investing. I just don’t know how to get the ball rolling so to speak.

    Reply

    • Phillip, I joined A + E a couple of weeks ago at Diamond level. Just received my beautiful welcome package. So, I was on the fence like you. I have about five companies that I will invest in within the next 30 days. One in particular, Blue, was of interest to me but I am not tech savvy. I read the pitch and researched social connecting apps and then slept on it. Woke up yesterday morning and invested in Blue. Received an email this morning from the co-founder, Jose Montero, thanking me for my $100 investment. I am not regretting it one bit. Just do it. Do your research and then sleep on it. Your research and gut instinct will guide you. Blue is the second company I have invested in at $100 each and I am on my way to twenty more. I figure I can spend $100 in a day dining out. Right? So why not put that money that may one day provide a 1000x ROI. That is how I see it. I wish you the very best with this great opportunity. I am so excited!

      Reply

  13. Great ideas, David . I am some what a conservative person, but now I feel alittle outside my comfort zone with your rules of investing * Thanks again, Jeff K.

    Reply

  14. I gotta say I love these! It’s truly insightful and so helpful. Seriosuly thank you for taking the time for these! Makes me more and more exited every time you break down another confusion barrier!!! Thanks again!

    Reply

  16. The advise I receive from you and Neil is priceless. I am so surprised at how supportive the Angel Investing masters are and the great advice you so generously offer. It is quite amazing! I have 43-year accounting career and I can count on one hand how many true mentors I was so fortunate to cross paths with. But in the angel investing world, there are so many experts willing to guide us newbies to success. Thank you a million times over.

    Reply

  18. Really good article David! As a novice Angel Investor, it appears I’m already following your advice. Thanks for sharing this valuable information.

    Reply

  21. Hi David,
    I’m new to investing and English is my second language, so I follow the recommendations. One of the tips you gave is Follow the smart $$. My question is how? Is there a way to see who invested in a startup? Is there a way to find people to follow.
    Thanks
    Ivetta

    Reply

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