Possible Insight

Visualizing Angel Diversification

with 2 comments

In playing with the data from my previous angel diversification posts (here, here, and here), I developed the best visualization so far of how to improve your angel portfolio with more investments.  Simply compare the cumulative probabilities of achieving given return levels for different portfolio sizes using historical AIPP angel data.

If this graph doesn’t convince someone, I don’t know what would:

aipprscmstratCDFbysize

This shows the marginal benefit of doubling your portfolio, starting at 25 investments.  At some point, your cumulative outcome probability drops off a cliff.  For 25 investments, the cliff is at 1x your money.  For 100 investments, the cliff is at 2x your money.  For 400 investments, the cliff is at 2.5x your money. (Yes, I admit to playing with the Y axis scale to dramatize the effect.)

At 800 investments, the cliff is all the way out at 3x your money.  You would have had a 95% chance of tripling your money!

Another way to think of it is that the area between any two lines is the cost of not diversifying your portfolio to that level.  Just look at the “wedge” between 25 and 200.  It’s enormous.  Now who doesn’t want to diversify?

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Written by Kevin

April 25, 2013 at 9:57 pm

Posted in Founder Advice

2 Responses

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