Angel Investing for the Cautious Optimist: Understanding the 'At Least Once' Principle"

Scared of angel investing because of its low success rate?

You wouldn’t be alone. The statistics around startup success are intimidating—only about 10% of startups make it past the initial stages. But if success were unattainable, venture capital as an industry wouldn’t exist.

In previous articles, including our previous piece on portfolio construction strategies, we’ve explored how building a diversified portfolio over time and investing across different markets can improve the odds of hitting a win. By spreading investments and adjusting based on learnings, investors can create more resilient portfolios and increase their chances of long-term success.

Yet, for many investors, the numbers and simulations in these strategies can seem abstract. Few people can play out a Monte Carlo Simulation and get the results of a 500 portfolio company!

That’s where the “at least once” principle comes in. As we explored in our recent article on how patient preferences influences healthcare spending, this concept offers a straightforward way to understand the probability of achieving at least one success over time, even with high individual failure rates. By focusing on the likelihood of at least one success, we can reassure investors that building a well-selected, diversified portfolio over time isn’t just a shot in the dark—it’s a calculated approach to improving outcomes in angel investing.

What is “At Least Once” Anyways?

The “At Least Once” concept is a probability principle often used to assess the likelihood of achieving a specific outcome over multiple tries, even when individual chances are low. In academic terms, it’s calculated by looking at the probability of a single outcome not happening and extending that probability across multiple attempts. Mathematically, this is expressed as:

P (at least one success)=1−(P (failure))ⁿ

where P (failure) is the probability of a single failure, and n is the number of attempts.

A more relatable example (at least for our readers with kids) comes from the inspiration of our previous article on patient preference:

So how does this relate to angel investing?

The Odds of Abject Failure Is Low With Enough Tries

For new angel investors, one of the most comforting aspects of building a portfolio is the probability of hitting at least one successful investment, even when individual companies have a high chance of failure. If you invest in a number of startups, the probability of at least one success increases with each additional investment, even when the odds are tough for each individual company.

For a portfolio of 20 investments and assuming a 90% startup failure rate, we can calculate the probability of having at least one success using the “At Least Once” calculation:

P (at least one success)=1−(P (0.9))²⁰ = 87%

So, there’s roughly an 87% chance of at least one success in a portfolio of 20 startups, even if each one has only a 10% chance of making it.

Suddenly, angel investing isn’t so scary!

Investing, Fast Or Slow?

Is there any nuance between investing quickly or slowly over time?

While mathematically, investing in 20 companies in one go achieves the same probability of at least one success as spreading it over time, there are some important tactical differences to consider.

Investing all at once brings some important advantages:

• Immediate Diversification: Investing in 20 companies within a short period of time provides a broad spread of opportunities all at once.

• Market Wave Advantage: This approach lets you capture specific trends, like the current AI boom, positioning you to benefit from a hot market wave.

However, investing heavily in a single period also comes with risks:

• Market Timing Risk: Investing heavily in one year means you’re more exposed to downturns right after a peak. For instance, tech investors in the dot-com boom faced steep losses when the bubble burst, and digital health investors struggled mightily post-COVID.

• Limited Flexibility: A one-time, large investment limits your ability to adjust based on new trends or insights, leaving you with little room to pivot if conditions change.

Don’t have the firepower to invest in 20 companies in a short period of time? Not to worry! For most, building a large portfolio of investments gradually over time is more achievable and comes with benefits that can increase long-term success odds.

Investing consistently over a decade—say, in 2 companies each year for 10 years, or 4 companies in 5 years—achieves a similar 20-company portfolio while introducing time diversification, which introduces additional benefits:

• Market Variation Over Time: By investing over multiple years, your portfolio spans different market conditions, economic cycles, and emerging trends. This mix of timing increases the chances of success even if a single year’s picks don’t all pan out.

• Adaptive Strategy: A multi-year approach gives you room to adjust. You can tweak your strategy, experiment with new fields, and respond to what’s working as you learn more, making it a flexible and adaptable way to build a portfolio.

• Psychological Benefit: Spreading investments over time can be psychologically reassuring. Investing consistently and incrementally reduces the stress of deploying large amounts at once, helping investors stay the course, learn from each investment, and avoid panic in the face of downturns.

  

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So Which Strategy Is Best?

Both investing quickly and slowly are valid and will likely be dictated by the investors’ financial standing, rather than any outright strategy. Regardless, for the individual investor we believe two things can help you pursue both strategies as you see fit

1. Invest in Low-Minimum Angel Syndicates: By joining syndicates with low minimums, like $1000, you can invest with other like-minded investors assemble a large portfolio over time. This approach provides portfolio diversification without the need for huge capital upfront, spreading the risk across more investments.

2. Invest with a Long Time Horizon in Mind: Building a portfolio gradually over multiple years offers time diversification, giving each new round of investments a fresh chance at success. Even if you have the financial standing to invest quickly, be of the mindset that early stage companies can take 10+ years to achieve meaning financial outcomes, so plan accordingly!

Angel Syndicates offer a convenient platform for individual investors to pursue both strategies. Particularly for healthcare investors, The Healthcare Syndicate offers a low cost way to invest in the best early stage healthcare companies that are improving the way we deliver care to patients. Please join us!

Conclusion

In a low-success environment like angel investing, a healthy dose of optimism is essential.

While statistics can sometimes mislead us, approaching investing with an evidence-based strategy can keep us grounded. By focusing on probabilities like the “at least once” principle, we can reframe our expectations and build resilience through steady, informed investments.

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