Knowing the return of an asset class is a crucial variable in making a portfolio allocation decision. Recently, interest in startup investments has motivated at least eight large studies in the US and UK to examine returns in the business angel market. The average return across all these studies is 27%. These studies further reveal that most of the returns come from only 5% to 10% of investments – the cases where the startup becomes very successful.
Most startups fail, resulting in a total or near-total loss of the invested capital. By modeling the distribution of individual startup outcomes that reflect this evidence, we have determined that a portfolio of angel investments should include at least 100 investments to adequately mitigate idiosyncratic risk.