Angel investors dream of finding and investing early in the next Uber, Airbnb, Waze, or Mobileye. While it’s easy to get seduced by the hype, serial startup investors know it is hard to be successful in this asset class. With the help of members of OurCrowd’s experienced investment team and other industry resources, we have put together a quick, three-part guide to ‘earning your wings’. These articles highlight essential terms and strategies while referencing accepted industry best practices; with these basics in hand, getting started in startup investing can be a lot smoother.
Part 2: Risky Business
Understand the Risk
The distribution of returns within a VC portfolio typically follows the power law curve. According to Horsley Bridge, if you take a longtime limited partner in VC funds who has been collecting data on VC returns since 1983, you’ll find that just 6% of their hundreds of investments have generated 60% of their total returns since 1985. Professor William Sahlman of Harvard Business School is quoted saying, “80% of a VC Fund’s returns are generated by 20% of its investments.” The Angel Resource Institute published an Angel Returns Study in 2016 which reported that 10% of all exits generated 85% of all cash. They also reported that the failure rate (exits at less than 1X) of startups in their study climbed to 70% (from 52%). Forbes claims that 90% of new businesses fail, with 50% failing within the first four years, according to the U.S. Bureau of Labor Statistics.