The Kauffman Foundation’s Angel Investor Performance Project (AIPP) was literally the largest study ever conducted on the returns of early-stage investing.
To gather the data, the authors took results from 539 individual angel investors, and 86 different angel investor groups. These angels were involved with 1,130 companies.
Many investors and data scientists have taken advantage of the robust dataset provided by the AIPP to do their own analysis of start-up investing returns.
One such analysis was done by Alex LaPrade, where he analyzed how diversification affects expected portfolio returns. Here are his results:
The chart above shows the results of LaPrade’s "Monte Carlo" simulation of investing in the 1,130 startups from the AIPP dataset at various portfolio sizes.
As you can see, with only a few start-up investments, your chances of breaking even are low. But according to this data, if you invest in 10 companies, you have an 80% chance of doubling your money.
If you invest in 50 companies, your odds of a double go up to 96%.
If you invest in a 100 companies, your chances for a double go up to 99%.
And if you invest in 500 companies, not only are you increasing your chance of breaking even to nearly 100%, but you’d have a 96.9% chance of tripling your money.
These conclusions are in line with the insights and real-world experience of successful angel investors like Dave McClure (who runs a fund explicitly named for this quantitative approach to investing: "500 Startups"), and successful venture capitalists like Fred Wilson.
