How many startups should a portfolio have?

There are three major driving forces that determine whether or not an angel investor’s portfolio takes off. First–and most impactful–is due diligence… but truthfully, intuition and chance play a part too.

That’s why top angel investors and VCs spread their capital among dozens, even hundreds, of different companies. Every startup investment carries risk–and due diligence, while critically important, doesn’t give them the power to see the future with 100% accuracy.

Imagine flipping a coin 10 times. Statistically, you should land on heads and tails five times each–but if you’ve ever actually tried it, you know it rarely shakes out that way.

With just 10 flips, you might wind up getting seven tails and three heads (like we just did while writing this). Why? The law of large numbers, which states that the more times you run an experiment, the more predictable your outcomes will be. Try flipping that coin 100 times; you’ll almost certainly get much closer to 50/50 results.

That same law applies to angel investing. Statistically, the more companies you invest in, the greater your chances of making a return. 

Some experts, like Christopher Mirabile of Launchpad Venture Group, suggest aiming for an absolute minimum of 10 angel investments (but, he says, “more is definitely better”).

Let’s revisit the hypothetical 10-startup portfolio we talked about last week. Over the course of five or 10 years, we might see the following potential outcomes:

• Four go to zero or return just a portion of your money

• Three of them break even and give you your investment back

• Two have modest exits (let’s say, 2-3X each)

• And one explodes in value–returning 10X, 20X, or even more.

Of course, that’s a purely hypothetical scenario. Still, a study by the Kauffman Foundation had similar findings: out of every 10 angel investments, just one or two on average provided 90%+ of a portfolio’s returns, kicking back roughly 10-30X each.

Others–like famous angel investor Jason Calacanis (Uber, Robinhood, Calm)–recommend a portfolio of at least 50 startups over a three to five-year timeline.

If that sounds like a tall order, look at it this way:

If you invested just $100 into one startup per month for the next five years, you’d have a 60-company portfolio under your belt.

And while due diligence is still an important piece of the puzzle, a recent study by AngelList analyzed the results of thousands of startup deals–and they found that quantity of investments is just as important, if not more so, as quality.

“Conventional investing wisdom tells us that VCs should pass on most deals they see. But our research indicates otherwise: At the seed stage, investors would increase their expected return by broadly indexing into every credible deal.”

“Credible,” of course, is the key word here–which is part of why every single offering on Republic goes through a rigorous screening process before launching.

It’s always a good idea to do your own due diligence, too. Even vetted opportunities are inherently risky… but with new opportunities going live on Republic every week, it’s easier than ever to build out a diversified portfolio.