Angel investing (3): Too much, or too little?

This is the third in an occasional series of posts about angel investing. My first post looked at 10 Tips for new angels; my second post talked about what to expect of your angel investments. This post tackles a question that grows in importance as you build experience, and a portfolio, of angel investments: how much money to devote to it?

How big is an angel investment?

Most angel investments are between £5k and £100k. I am ignoring here the punts people can make on retail investment platforms like Crowdcube/Seedrs, which I will cover in a separate blog post.

A company raising money from angels will typically be raising between £100k and £1m. Their valuation will usually be between about £500k and £5m. A very normal round would be around £150k investment, buying perhaps 15% of the company (i.e. valuing the company, post investment, at £1m). In such an investment round, there would usually be perhaps 10-15 investors, ranging from £5k to £50k each. Investors with less than £5k to offer are quite a lot of bother for not much impact; conversely, an investor with £100k+ to offer might just strike their own deal – but these investors are rare and by definition such deals are usually hidden from view.

With £5k+ required per investment, angel investing is not really a regular FIRE activity. But it is a more common ‘Fat FIRE’ activity, and several regulars on the FIRE blogs mention dabbling in angel investing – not least Monevator’s TI himself. After all, even frugal FIRE types will amass well over £200k of investments before they are financially independent, and you might think that a £200k portfolio potentially has room for quite a few £5k investments. If you have a say 60:40 equity:other weighting, and if angel investing can deliver excellent returns, isn’t angel investing a potentially effective way to deploy your equity assets?

This blog post looks at the topic from the point of view of the allocation, which is a very dry topic until you have made a few angel investments and started to think about how they fit in to your net worth / FIRE / allocation.

1: The asset allocation paradigm

Most ‘textbook’ approaches to managing wealth start with considering the allocation into different asset types. A pretty typical, and therefore reasonably ‘ideal’, allocation is shown below. This ‘textbook’ says to have a reasonable pot of cash on hand, at least 3 months’ spending, and then beyond that have a equity:bonds mix with, usually, more equities than bonds. Around the fringes of that core allocation, feel free to have ‘alternatives’/other. You’ll see that in the pie chart below alternatives are shown as 6% of the total wealth; this is a fairly high allocation, as many people would say 5%/2%/similar.

Average high net worth asset allocation

What are ‘alternative assets’? Well, how long is a piece of alternative string? This label can be applied to anything high risk /illiquid / unconventional – this would include cryptocurrency investments, classic cars, old masters paintings, and certain hedge funds. It would also, usually, be where you’d put angel investments.

I have taken the asset allocation model very much to heart. As a lover of public equities, I have learnt the hard way the downsides of private investments, and think that treating them as ‘alternative’ is very important. So in my mental model, I think of angel investing as my ‘bit on the side’. I am happy to have a few percent of my portfolio in angel investments, but that is about it.

Challenges with the asset allocation paradigm

So, a few years in, and you’ve made a handful of angel investments. Say, for £10k, £15k, £20k, over 3-4 years. Against, say, a total portfolio of around £1m. And let’s say that you are targeting an allocation of 5-7%, roughly in line with the HNW pie chart shown above. You’re holdings are in roughly the right place, with investments totalling £45k out of a total pot of £1m.

The first challenge you start to face, as you consider your asset allocation, is knowing what value to place on your angel portfolios. The reality is that a few years after investing you probably have very little visibility in what your holdings are worth. You will (probably) know if one of the businesses has failed completely, which is fairly likely. But if one holding starts to do pretty well, what does that mean your investment is now worth? That is very hard to guage.

Continue reading “Angel investing (3): Too much, or too little?”

Sep 2020: update on a zero month, and on Q3

September saw some lovely weather. I found myself getting out around a lot of water, for some reason. London has a lot more water than just the Thames.

Not an elephant, this white stadium
Cheaper than the real Venice
Modern Wapping
The famous Thames

Autumn kicked in with a vengeance at the end of the month. Along with it, the surge in Covid-19 cases that has been occurring across Europe started happening in the UK too. The government brought in a ‘rule of six’ (people, maximum, except in workplaces / weddings). In London our lockdown remains relatively mild, but there is a definite question of how long that can last – while some pubs/restaurants are models of compliance, others aren’t – if I get covid-19 anywhere it will be from one of them, I am virtually certain. Most likely from some waiter leaning over me, with their mask not reaching their lower lip, breathing a dose-y viral load all over me in a confined indoor space.

I’ve been back in the office a few times. I’ve used quite a few Ubers, and been on the tube a couple of times. I’ve been out to quite a few restaurants/similar. My spending is definitely returning to normal.

Continue reading “Sep 2020: update on a zero month, and on Q3”

August 2020: Eat tech to help out your returns

In the UK, August was ‘Eat Out To Help Out’ month.

A whizzy gimmick by the government gave us 50% off at restaurants/cafes/pubs on Mondays-Wednesdays. This proved a big hit, with restaurants that have never before opened on a Monday doing a roaring trade. Allegedly 40% of covers were people who hadn’t eaten out since lockdown; if they keep eating out, then the scheme should definitely prove a success.

The UK was jostled off its place on the Covid naughty step in August. Most other European countries saw Covid-19 cases per person rise dramatically, with a bunch of hitherto golden children now scoring worse than the UK. Put simply, the UK has not deteroriated as fast as other places – Ireland, France, the Netherlands are all now officially ‘less safe’ than the UK. Even Greece, largely a collection of sunny disconnected islands, threatens to overtake the UK.

Have BoJo’s “world beating” policy measures finally given the UK its place in the sun? Or, whisper it quietly, has the UK’s travel quarantine policy proved surprisingly appropriate for the summer months – at deterring travel to/from virus hotspots. Are UK workers just too scared to return to the office? Or is the UK’s service-driven economy proving more capable of operating from home than the more traditional workplaces in Italy / Germany / etc? Time will tell.

Meanwhile, I didn’t use the tube or a bus once – though I did use Uber a bit. I don’t think I went into the West End, London’s historic centre, at all. I got around a bit though, finding myself in some enjoyably off-the-beaten track spots.

Deserted spot, North
Deserted spot, West
Famous park, East
Park I’d never heard of, East
Continue reading “August 2020: Eat tech to help out your returns”