Defining your comfort zone is the first step. With the extensive research and conversations we have had with many successful Angel Investors, we have learned to apply the 80/20 rule (the Pareto principle) to most data points, and we should apply it in this brief as well. What type of personality you are as an investor and your risk tolerance, will require you to position yourself on the risk scale from being very conservative to being highly bullish. It is up to you. We highly recommend for you not to try to be someone you are not, it will not work well in the long run, for you that is.
According to various data points that came from years of studying Angel Investing suggest that the average angel investor should allocate 8 to 10% of their available capital. Take into consideration that most highly successful Angel Investors allocating no more than 20% of their investment portfolio to high-risk investments. Their experience over time and their successes allow them to increase their risk tolerance, overtime that is. After being in the game for a while, you acquire experience and you will learn from your successes and failures, you will find yourself in the position that you’re reinvesting your profits and will feel more comfortable to increase your risk profile a bit at the time.
Like in any other professional arena it will require a high level of discipline to ensure that you don’t cross the line and put yourself outside your comfort zone, ie. at very high risk.
An example: if you are a conservative investor and your portfolio net worth is $2M, you could allocate 10% of your capital = 200k for high-risk investment. If you are a bullish investor and your portfolio net worth is $2M you could allocate 20% of your portfolio = 400k high-risk investment. It is very simple math and you can take it from here.
In other words, don’t risk more money than you are willing and able to lose without causing a negative impact on your professional and personal life. And I can’t stress it enough, you will need to get into the game with your eyes wide open, calculated, and resolved with a plan. As the saying goes; “if you do not know where you are going, how will you know when you get there?”
Venture investing is all about diversification and mitigation of risk. So you will need to know what you are trying to accomplish and set your own boundaries. The most successful investors I have worked with over time are highly calculated and disciplined.
In summary here are the guidelines:
- Allocate a fixed amount of capital you are willing to risk
- Establish your risk profile, conservative, moderate, bullish, etc..
- Create a plan of what would like to accomplish, what is your minimum expected return\
- Define your portfolio risk allocation 20/80/20 or 30/40/30 etc..
- Select a shortlist of industries or market segments you are comfortable with and have a sufficient level of knowledge.
I know that for the experienced investors to the novice one, every investor is getting into the venture game with one intention and one intention only to make money, yet you need to be willing to play the game as if you already lost it, lose your attachments and the strength attached to the money, it will allow you to play with complete freedom.