In this article, I’m going to let you in on a secret - I’m going to share the ONE STRATEGY that successful angel investors do that gives them the highest likelihood of successful outcomes.

I had coffee a few months ago with someone I respect. Let's call him Jorge. Jorge was a serial SaaS Founder and CEO with several solid exits behind him. 

He told me he had started writing angel checks after his second exit. He wanted to put some of the proceeds to work and to support founders he believed in.

When you read this person's profile, a serial SaaS founder, you might automatically think, "Jorge is definitely the kind of person who could be successful in angel investing. He has built, scaled, and sold two companies, TWICE. He understands the mindfield and what it takes." 

But guess what? 

Jorge told me that he lost money on “every single deal.”

His exact words to me were in our conversation were: "I didn't know how to do the due diligence. I didn't know what I was getting involved with. I was investing emotionally instead of using my brain to do the numbers."

Whoa. That is super transparent. 

How could this be? What gives? 

Let me contrast two angel investing strategies that I call picking the winners vs. playing the numbers. 

The natural, emotional way to do angel investing is to try to “pick the winners.”

Investors evaluate the business model, team, market, and the collective due diligence try to answer this question:

"Is this company the one that is going to win?" 

Hence, they are like "pickers," sort of like penny-stock pickers, "This is the one that is gonna go, so I’m going to invest." 

Now, even though picking the winners is a very suboptimal strategy, it is also a very natural approach to fall into.

After all, the business owner or executive built a business by picking the right product, the right customer, the right talent. Pattern recognition is what got them where they are. It's the mentality of, "This profile of person_, ___customer___, strategy_, tends to work out, this one doesn't, etc." 

According to the data, the "Is this company the one that is going to win" is the wrong question to be asking while angel investing.

In other words, don’t try to be like Morpheus in the Matrix and try to find “The One” to invest in on the front end.

Instead, angel investors should behave like "allocators."

To be successful in angel investing, one must systematically allocate across many companies over time. 

They create their own mutual fund portfolio of angel investments - many investments over time.

✅ The Asymmetric Angel investor moves to a world that he or she cannot control (trying to predict which companies will actually win)

…to a world that he or she can control - systematic diversification. ✅

In this way, the decision to invest or to not invest in a company, ideally becomes a lot easier and with much less pressure on you as an investor. 

You trust the mathematics of the asset class instead of the supposed likelihood of this one particular startup you are considering. 

Playing the Numbers is similar to what Nick Fury does from The Avengers, Marvel superhero movies. Fury, played by Samuel L Jackson, is a masterful spy and leader of S.H.I.E.L.D., the elite spy agency.

Nick Fury did not focus on finding “The One.” Rather, he created The Avenger’s Initiative and built a portfolio of enhanced individuals - Ironman, Captain America, Thor, The Hulk, Black Widow and Hawkeye. Fury knew that the one who mattered most would only reveal themselves when the moment demanded it. He cast a wide net and recruited many candidates. The team as a system is what produced the hero you needed when you needed them.

Now, as you will see below in the data, angel investing requires more than just betting on six superheros, or startups… but you get the idea!

In practice, in angel investing,

✅ Playing the numbers does two things:

Here are the mathematics, from the Angel Capital Association's own data on two of the largest angel groups in the country (Tech Coast Angels and Central Texas Angels Network):

8 companies out of 247 companies produced 77% of dollar returns.

3% of companies produces 77% of dollar returns. 

That ratio is the actual game. The Asymmetric Angel investor doesn't try to soothsay their way into the future and look into a crystal ball to pick the winning company. That is not possible.

An Asymmetric Angel makes sure they're allocated themselves into those eight. Not because of their own wisdom and insight into picking those eight, but because they are systematically allocating across the numbers and those eight are part of a larger pool of investments that they had made over time. 

Put another way - Yes, angel investing is about investing in the winners.

✅ However, the “picking the winners” strategy is overly fixated on investing in the “right ones” on the front end. In so doing, you invest in a small few. This goes against the data on how to be successful.

The “allocating across the numbers” strategy is fixated on investing in a plethora. In so doing, they invest in the “right ones,” which can only be seen in retrospect. ✅

Playing the numbers also takes the pressure off of you as an investor. 

As in any business, there are way too many factors in the path of success that trying to answer the, “Is this company the one to win,” is an unanswerable question. 

Worse yet, trying to pick the winners may actually cause an investor to not invest in anything, or worse, invest in only a small set of companies, which gets back to the point of "picking the winners" again which is a very suboptimal strategy to generate financial returns. 

In other words, don’t try to be like Morpheus in the Matrix and find “The One.”

Find “The One” or “The Second” by investing in a plethora of companies over time, which gives you the highest statistical likelihood of finding the winners that you need

With all this said, I'm going to let you in on a little secret:

✅ The investors in Tundra Angels with the best portfolios, the ones with the highest paper returns, the ones positioned to catch the next grand slam, share one characteristic:

They invest in nearly every Tundra Angels deal. ✅

Now, they pass on a small few for sure. But they invest in nearly every single Tundra Angels deal.

They trust the Tundra Angels “product” - our Phase I front-end vetting process and our back-end Phase II due diligence process from our expert members in the Tundra Angels network.

When a startup opportunity checks out through our due diligence process and we take commitments, these investors are in. They allocate. They rarely hold back.

Again, it isn’t necessarily because they see something on a startup opportunity that the rest of the members don’t. It’s because, based on the data above, that is how one makes money in angel investing.

If you were to go down the list of the portfolio companies that they are in, you will see “X multiple, Y multiple, Z multiple,” etc.

Every investment is not going to work out. Some capital will be lost. But every investment is an access door to potential upside.

 ✅ An angel investor’s job is to maximize those access doors to potential upside through strong diversification.  ✅

I want every angel investor, either new or experienced, to know this - 

✅ The Asymmetric Angel investor moves to a world that he or she cannot control (trying to predict which companies will actually win)

…to a world that he or she can control - systematic diversification in many companies over time. ✅

Move from “picking” to “allocating.”

✅ The “picking the winners” strategy is overly fixated on investing in the “right ones” on the front end. In so doing, you invest in a small few.

The “allocating across the numbers” strategy is fixated on investing in a plethora. In so doing, they invest in the “right ones,” which can only be seen in retrospect. ✅

Yes, this allocating mindest runs against our natural instincts. It runs against the stock-picker mental model. It even runs against how most people imagine angel investing, "I made the right call on Company X."

The question is really, "Am I in enough companies to participate in the upside that the angel investing math promises." 

But by allocating across the numbers, you are controlling the outcome by trusting the math of the asset class. By giving yourself enough shots on goal to hit that small percentage of deals that make up for everything else and then some.

You're catching them by investing in the companies in the pitch meeting room enough times. That is exactly the room we built Tundra Angels to be.

Don’t be Morpheus. Become Nick Fury.

See you next Wednesday.

-Matthew

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