In this article, we’ll discuss What is a good pace for making new investments on an annual basis & further discuss ways to build a mature angel investment portfolio. Understanding the pace required to make new investments on an annual basis is extremely critical in order to ensure investors not only maximize the law of returns but also ensure they have the maximum possible chance to get an outlier.

Understanding ways to build a mature angel investment portfolio is crucial for several reasons. Firstly, it spreads risk across a diverse range of startups, reducing the impact of potential losses from any single investment. Secondly, a mature portfolio allows investors to capitalize on the potential growth of successful startups, maximizing returns over time. Additionally, it provides opportunities for learning and mentorship, as investors engage with founders and contribute to their growth. Overall, building a mature angel investment portfolio is essential for long-term financial success and impact.

Like always, we’ll try to explain these concepts using a story. Without any further delay, Let’s begin.

I am sure all of you would have heard of Sarah, the seasoned investor, in the bustling city of Bengaluru. Known for her keen eye and strategic thinking, Sarah had built a reputation as a successful angel investor. She had been through the highs and lows of the market and had a treasure trove of lessons learned so far.

One of the most valuable lessons she learned was about the right pace for making new investments.
Years ago, Sarah started her angel investing journey with an eager heart and a sizable saving. In her first year, instead of the recommended 5 startups, she invested in 30 startups, excited by the potential she saw in each one. However, by the end of the first 6 months, she realized that almost half of her total investment had run out of business. It was at this point that she realized that her approach was more scattergun than strategic. Managing such a large number of investments spread her thin, making it hard to give each startup the attention it needed.

After a year of reflection and research, Sarah decided to change her strategy. She attended a masterclass on angel investing, where she learned about the importance of pacing her investments. The instructor, a veteran investor named Rajesh, shared a golden rule: "Invest in 10-12 new startups per year & do it over a 5-year horizon. Investment in startups often begins to generate returns from the 5th year onwards as the business matures and opportunities for exits, such as acquisitions or IPOs, become more prevalent. This rotation of capital allows investors to reinvest returns into new ventures, perpetuating the cycle of growth and innovation. In fact in most cases when you start meeting the management team, understand their vision, take a look at their business model, and growth prospects, and make a decision to invest. This pace allows you to diversify your portfolio while still dedicating sufficient time and resources to each venture."

Taking Rajesh’s advice to heart, Sarah adopted this new approach. She realized that she filtered almost 80% of startups out of 12 that she had selected, ultimately, leaving her with only 4-6 startups, following which she carefully selected six startups to invest in. This reduced pace allowed her to conduct thorough due diligence, form deeper relationships with the founders, and provide meaningful mentorship and support. At the same time, this also allowed her the flexibility to diversify her savings toward other asset classes. By the end of the year, the difference was palpable. Her portfolio startups were performing better, and she felt more connected and invested in their success.

Taking the next five years as a horizon, Sarah continued to invest in 5-7 startups annually. This strategy paid off handsomely. Her portfolio was diversified and filled with startups with strong potential, thanks to the time and effort she could devote to each one.

Sarah's story became a cornerstone lesson in the angel investing community in Bengaluru. She often shared her journey at conferences and masterclasses, emphasizing the importance of a measured pace. "It's not about how many investments you make," she would say, "but how well you support and nurture each one. You should neither make all investments in a single shot nor invest in all-in-one startups. Most importantly you need to keep this disciplined approach for 5 years."

After a few years, Sarah again contacted Rajesh with a query. This time it was regarding building a mature portfolio. Her question was simple ‘How to build a mature portfolio?’
Rajesh explained to her that on average she will be left with only 20-25 companies in 5 years because you don’t find so many good opportunities.

After 5 years, investors start finding good exit opportunities but therein lies a problem which most investors unknowingly commit. Usually, once investors have invested in the first year, they just sit back and wait for an exit opportunity to take place. This is a wrong practice since these positions would mature after 5 years but once they have matured, investors are not left with any further exit opportunity.

Instead what Rajesh advised investors was to constantly maintain their pace of investments i.e. 5-6 investments annually so that after the 5 years, every year, investors have an exit opportunity that generates good returns & they can re-invest those returns to further generate returns.This way a cycle of investments and continuous returns is formed.

5 to 6 startups, Rajesh explained, strike a balance between diversification and manageability. It allows an investor to spread risk across multiple ventures while still being able to devote sufficient time and resources to each one.

Sarah’s disciplined approach to pacing her investments coupled with a sound advisor like Rajesh guiding her in building a mature portfolio taught aspiring investors the value of quality over quantity. By focusing on a manageable number of startups each year, Sarah was able to provide the guidance and support that turned promising ideas into successful businesses.