AngelList has released new research that’s sure to stir up debate in the venture capital world. In this new report, Abe Othman, a data scientist at AngelList, makes the case that most investors should invest broadly across as many “credible deals” as possible.
Here’s an excerpt from the report’s summary (emphasis mine):
How can you avoid missing the best seed deal? The simplest way is to put money into every credible deal. Maybe you have a crystal ball that gives you perfect foresight, in which case you can pick only the best winners. Even then, if your crystal ball is even a little cloudy eventually you will miss a winning deal – and that winning deal might have been the best-performing investment.
Simulations on 10-year investing windows for seed-stage deals suggest fewer than 10% of investors will beat the index, even if those investors have skill in picking deals. Like Vanguard has taught us in the public markets, individual investors could benefit from viewing the index as the default and then overlaying individual deals that they like.
I agree with the broad implications of this report. Individual online angel investors should invest in a large number of deals. I personally have more than 100 online angel investments and continue to make 15 to 20 more per year.
However, I do disagree in some ways. First of all, it’s not realistic for most investors to invest in every “credible deal.” And even if we did, it would get rather hectic tracking hundreds, then thousands of tiny investments.
Secondly, what is a “credible deal” anyway? I’m assuming that Othman is referring to prescreened deals, like the ones on AngelList. However, AngelList is the exception rather than the rule.
There’s no other startup investing site on earth with a high volume of great early-stage deals like AngelList (yet). So I hope that people don’t read this report and then log on to nonaccredited sites like Wefunder and start investing in every deal. I don’t believe that would yield nearly the same types of returns that AngelList has seen.
Still, this is an important report. It shows that when deals are properly screened for “credibility,” as they are on AngelList, you’ll want to invest in a lot of them.
Take a look at the full report (PDF) here.