Once an investment is attractive, the remaining decision is how much. Position size should reflect the probability of losing everything, the portfolio you plan to build and what you can afford to lose.
10 min read · Level 4
I think sizing is where investment discipline is most often lost, because it happens after the exciting part of the decision is over. Deciding the maximum position before meeting any company is one of the few rules that reliably survives meeting a very persuasive founder.
Sizing starts with the downside. In early-stage investing, the most likely single outcome for any one company is losing most or all of the money.
A practical framework for an angel:
Total set aside for early-stage investing 400,000 (money that could be lost without affecting essential needs) Planned number of companies 20 Reserves for follow-ons 50% Initial cheque per company 400,000 x 50% / 20 = 10,000 Maximum total in any one company 10,000 initial + up to 20,000 follow-on = 30,000 Maximum share of the allocation 30,000 / 400,000 = 7.5%
Conviction can adjust size within limits - for example, 1.5x the standard cheque for the highest-conviction deals - but not beyond the maximum.
The question to ask before every cheque: if this goes to zero, is the result acceptable and consistent with the portfolio plan?
Because conviction does not change the base rate of failure much. Investors who size by excitement end up with large positions in their most exciting companies, which are not reliably their most successful ones.
Consistent sizing also makes the portfolio work as designed: enough positions to give the few large outcomes a chance to occur.
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Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
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Two angels with 400,000.
Angel A: 10,000 initial cheques into 20 companies, reserves for follow-ons Angel B: 100,000 into the most exciting company, then 30,000 each into ten others
Angel B has 25% of the allocation in one company (100,000 / 400,000) and no reserves. If that company fails, a quarter of the allocation is gone and there is no capital to support the winners among the other ten. Angel A's outcome depends on the whole portfolio, which is how early-stage returns usually work.
Deciding cheque size by how excited you are about a company rather than by a plan that assumes most individual investments will fail.
Decide how much can go into this asset class without affecting essential needs.
Choose the number of companies and share held for follow-ons.
Calculate the initial cheque and the most you will ever hold in one company.
Adjust modestly for conviction without breaking the maximum.
Before committing money to any individual early-stage investment.
Do not invest money in early-stage companies that you may need, and check local eligibility rules and protections before investing directly.
Studies of angel investor returns, including research associated with angel investor associations, have found that investors with more investments tended to achieve better overall outcomes, consistent with the concentration of returns in a small number of companies.
Portfolio breadth matters because nobody reliably picks the winners in advance.
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