Neil Patel here. Today, I want to talk about the biggest mistake you could make as an angel investor.

When I first started out, more than ten years ago, I made a few choices that I wish I could go back and change.

Don’t get me wrong. I was still making good returns on my portfolio.

But I did put my money behind a couple of projects that didn’t quite flourish. Those cut into my bottom line.

I didn’t start making amazing returns until a few years later – once I honed my approach.

Those underwhelming investments taught me a critical lesson.

In fact, it’s the biggest piece of advice I can give you, as a fellow angel investor.

That’s why you’re here, after all – to learn from my experience, mistakes and all, so you don’t have to make them yourself.

Here’s what held some of my earlier investments back: the total addressable market (TAM) was too small, stunting revenue growth and undercutting my ROI.

Let me explain.

The total addressable market is basically the maximum revenue opportunity available to a business.

So, if you’re building a business that delivers ice cream sandwiches by drone in San Francisco, your TAM might be influenced by the following factors:

If you do that math, you end up with a TAM of $31,129,472 annually.

884,360 x 0.80 x 0.50 x $22.00 x 4 = 31,129,472

That’s not bad, but $31 million a year in revenue is small beans when you only own a tiny piece of a company.

Now suppose that the startup has a sound, actionable plan to expand. They intend to deliver to the entire United States.

Your multipliers will change a bit – outside of metropolitan San Francisco, an app like this is sure to do less business. For example:

These are rosy estimates, possibly influenced by my own love of ice cream sandwiches. A business like this, delivering just one product, would be unlikely to succeed in a world where consumers expect products and services to multitask. Not to mention the high cost of drone deliveries in rural America, where property lines can be several miles across.

But for the sake of explanation, let’s go with it. Even with lower margins, expanding nationally bumps our TAM up to $3,973,050,000.

That’s 127x more revenue… and a return on investment you’ll want to write home about.

Today, I only invest in startups with a huge TAM – a billion dollars or more.

Of course, every once in a while, you’ll come across a startup with a pretty small TAM that you’ll want to invest in anyways.

That’s okay too. The beautiful thing about angel investing is that it can be about more than just the money.

There are other types of “returns,” besides cash, that you can reap from this game (more about that here).

In fact, most angels will occasionally fund a “passion project” or two.

But the billion-dollar businesses are the ones that will make you your fortune.

So, when it comes to your core portfolio, always stick to startups that have the potential to grow really, super, insanely huge – startups with a big TAM.

Until next time,

Neil Patel


Comments

22 responses to “The Best Lesson I Learned in Angel Investing”

  1. Hi Kevena! Thanks to the JOBS Act of 2016, every American is now eligible to invest in startups long before they IPO. Every deal is a little bit different, but there are absolutely opportunities to invest with just $50 or $100. This will be a key part of The Angels + Entrepreneurs Summit… Stay tuned for more details!

    Blair S.
    Editor, The Startup Investor with Neil Patel

  2. Hi,
    I live in South Africa and would want to participate in ventures like this.
    With so many products advertised, when I want to participate or order, I am informed that it is only for USA citizens.
    Who do I go about being an angel investor?

    Regards
    Cobus

  3. Neil, I love your videos, but am wondering if you can make them variable speed as many videos are today. There is a lot of material to review and time is limited. I would love to listen to them at 1.25 or 1.5 times actual speed. Thanks in advance for thinking about this.

  4. Neil,
    Hi, it’s Kathy and this is my very first post. I have watched all of your video’s and they are very helpful but as a new angel with wings not fully ready for flight I want you to tell me which one of the businesses I’ve seen so far which one you would invest in. Which one is a TAM. Then I can make up my mind to take it or leave it.
    What is your opinion?

    Sincerely,
    Kathy Miller

  5. Hi Neil,
    I am interested in your response to Kathy Millers question regarding which of your first companies have a TAM that you would consider investing in.
    Thanks for your response.

  6. Hi Neil,
    To piggy back on Michael and Kathy, would it be possible to add your insight pertaining to the TAMability of companies with your feedback on the monthly deals?

    Thanks!

  7. I don’t want to give up yet, but I am most discouraged that Neil does not invest in any of the STARTUPS.

    I p[aid $495 for a LIFETIME membership which I do not mind.

    But not knowing which companies he recommends means that I would be going into this STARTUPS BLIND. Since most companies (STARTUPS)
    are quite risky, going it alone, seems very very foolish.

  8. The program is great and gives step by step instructions on best investments that you can follow up with your own research on each recommendation by Neil and staff to understand the methods and results for yourself. After that you can invest small, medium or large, depending on where you are at personally. I believe that too many people do not listen well or follow thru with learning and study first. Then when it doesn’t work for them, they wonder why. The answers are ALL in the program as far as I can see. But, you must study and learn first, asking specific questions as you proceed with the training.

  9. Neil, when you come out with information on new start up’s, can you also furnish the TAM information for each new start up being offered. This would be huge for some of us that know very little on investing, or don’t have the time to do all of the research on the TAM’s.

    Thanks,
    Chuck

  10. Okay. I’ve read a lot of the comments about Neil’s posts and videos. There seems to be this impression out there that Neil is going to specifically tell you what and how to invest your money. It was clear from the very start that he is passing along knowledge that took him years to accumulate. He is not your broker. He cannot legally tell you what to invest in. He has made it clear that all start up investments are at high risk. If you cannot afford to lose the money, then don’t invest it.
    Listen, look at the materials, do your own research. If you don’t understand the company, skip it and move to the next one.
    Making your first risky investment is difficult. You could lose it completely or might turn a very nice profit. You must be patient, do your research, and invest when you feel right about the company/product.
    Neil is opening the door, but you have to walk through the door. I don’t know about you, but I wasn’t aware these opportunities existed until watching his video. I am all in and, so far, have invested $100 each in five companies, one of which I found on my own. I am learning in leaps and bounds, and really enjoying it.

  11. Are you going, at some point, going to inform us just what is out there to invest in. Simeone said they had already invested in 5 different entities. Where did they get the names of these start=up companies?

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