What are the typical disadvantages of joining Angel Groups?

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One important disadvantage of being a member of an Angel Group relies on the lack of diversification. Companies that seek capital from these groups receive in my experience checks with a median size of $20K. Having in mind that startup companies fail 90% of the time, it is very hard to pick winners reason. The only way to guard against this (unfortunate reality) is to hedge your bets by diversifying investments into a basket (multiple) of startups.

Diversification is critical, as the rule of thumb of successful angel investor portfolios is that 1/3 of companies will run out of money and die, another 1/3 will break even, and the rest will provide returns ultimately covering the losses from the companies that failed.

Another component that makes it hard for Angel Groups to scale is the due diligence process. Being a very manual process with a median time of 20 hours invested on each deal, this process really limits the amount of deals that can be reviewed per month as the HBAN study from 2007 noted.

In addition, Angel Groups are very much focused on the location where they are based, which makes it very difficult to come across companies that are based in other regions. Now with online platforms you have the opportunity to source deals from all over the world.

tpr Train Answered on September 7, 2015.
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