Portfolio construction and diversification
Your first few angel investments feel like separate decisions. You meet a founder, read the deck, do the diligence, write the cheque or don’t. Over time those decisions add up, and the question changes from “do I like this company?” to “what job does this investment do in my portfolio?”
Start with what you can afford to lose
Early-stage investing is uncertain. A promising business with a capable team can still fail to raise its next round, lose its biggest customer, or take years longer than planned to turn a profit. Some of your investments will go to zero. A small number may produce most of your eventual return. At the outset you cannot tell which is which.
So before you decide how many startups to back, decide how much of your total wealth you are prepared to put into high-risk, illiquid investments. This is money you must be able to leave alone for years, with no certainty about when, or whether, any of it comes back.
- If every angel investment I made went to zero, would my finances still be secure?
- How much can I commit without needing it back for several years?
- What other high-risk or illiquid investments do I already hold?
- How much time can I give to sourcing, diligence and keeping up with the companies?
Keep money for emergencies, debt payments and near-term plans outside your angel budget, and never count on an exit to pay for a known expense. Your budget is the total you are prepared to commit over the life of the plan, including follow-ons, syndicate or platform costs, and anything you have already committed. It is a limit, not a target you have to spend.
Turn your thesis into portfolio rules
Your investment thesis, from earlier in this course, describes the founders and businesses you want to back and why. Your portfolio strategy puts numbers and boundaries around it.
Say you focus on UK pre-seed businesses in health and sustainability because you know those markets and have useful networks. Good start. Now decide: will you invest only through a syndicate, or directly as well? What is the most you will put into any one company? Will you back businesses outside your strongest sector to reduce concentration, or does that take you past the point where you can judge them properly?
Don’t diversify for the sake of it
- There is no value in backing businesses you don’t understand just to fill a category
- Ten companies exposed to the same customer, regulation or funding market are less diversified than the number suggests
- Look past the labels: different sectors can share the same underlying risk
Four objectives to write down
- Invest only money I can afford to lose and hold for the long term
- Back companies that fit my thesis and pass a consistent diligence process
- Build exposure across several businesses, founders and deal sources
- Reserve capital for selective follow-ons without treating them as automatic
You may also have non-financial objectives, such as backing underrepresented founders or putting your expertise to work in a particular sector. Write those down alongside the financial ones. Neither removes the need to judge each investment on its merits.
Plan the number and size of your cheques
A single startup is a highly concentrated bet. A portfolio spreads your exposure across companies whose outcomes will differ. Around 15 to 20 investments is the usual working ambition, and an experienced angel writing for the UKBAA argues you need at least 20 for reasonable diversification. Treat that as a planning guide, not a threshold where losses disappear. Most people build towards it over several years.
A £40,000 budget, worked through
Reserve half for later rounds and you have £20,000 for initial cheques. Across 20 companies, that is £1,000 per company before fees. If the deals you actually see have a £5,000 minimum, the plan does not work: four investments would use up the whole initial allocation.
Something has to change: the budget, the timescale, the ticket size or the route in. A syndicate or pooled vehicle can make smaller exposures possible, but check its minimums, fees, terms and which decisions you are handing to someone else.
The point is not to force 20 investments into your budget. It is to spot the mismatch before you write a cheque.
Fewer, better, is a fine start
A handful of considered investments beats a rushed sprint to a number. Just be honest with yourself about the concentration risk while the portfolio is small.
Set an initial ticket limit
It stops you making an oversized first cheque into the company you are most excited about. The best pitch you see in your first month is not necessarily the best opportunity of the next three years.
Keep capital back for follow-on rounds
Most growing startups raise more than once. A follow-on is a further investment in a company you already back when it raises again. Holding money in reserve gives you the option to take part if the company has made progress and the new round still looks attractive.
A simple starting model is 50 percent for initial investments and 50 percent reserved for follow-ons. On a £40,000 budget, that is £20,000 for new companies and £20,000 held back. It is a planning assumption, not a rule. The right reserve depends on the stage you invest at, how much more your companies are likely to need, your available cash, and whether you would rather make more initial investments instead.
- What did the company say it would achieve with the last round, and what has it actually achieved?
- How much cash does it have, how fast is it burning, and what milestone should this round fund?
- Have the team, market, risks or terms changed?
- At this valuation, would I invest if I were seeing the company for the first time today?
- How much exposure would I have to this one company after the new cheque?
You may decide to back a company that has earned more of your conviction. You may also decline and accept that your percentage will be diluted as new shares are issued. That is a normal portfolio decision, not disloyalty to the founder.
Diversify properly, including across time
Diversification is more than a company count. Six dimensions to check together:
Company
What share of my total angel budget would be tied up in this one business, including follow-ons?
Sector and business model
Would the same market shock hit several of my companies at once?
Stage
Am I taking the same product, customer and financing risks in every deal?
Geography
Are my companies all exposed to the same local funding market or regulator?
Investment date
Am I putting everything in during one period of valuations and market conditions?
Route to market
Am I only seeing deals through one syndicate or network, with the same selection biases every time?
Investing over time is as useful as spreading across sectors. It lets you learn from early decisions, see different market conditions, and avoid committing the full budget before you understand your own process. A two- or three-year window for initial investments, reviewed every six months, is a sensible frame, with the freedom to slow down when good opportunities are thin.
Diversification has limits. Startup outcomes move together when fundraising dries up or buyers cut spending. Twenty companies does not guarantee a profit, and even a winner can take a long time to return cash.
Use the same process for every deal
A portfolio plan is only useful if it shapes the next decision. For each opportunity, go back to the earlier lessons: screen against your thesis, do diligence proportionate to the stage, and understand the terms. Judge the founders’ ability to execute, the size and accessibility of the market, product differentiation, evidence of demand, cash needs and plausible paths to scale. Treat forecasts as assumptions to test, not promises.
Write a short decision note
- Why the company fits your thesis and what you think it could become
- The two or three risks that would change your mind
- Your initial cheque and the maximum exposure you would accept later
- What evidence you would want before considering a follow-on
- What this investment adds to the portfolio you already have
Your portfolio checklist
- Budget and loss capacity: total budget across all high-risk holdings, and could I lose it?
- Objectives and thesis: which sectors, stages and geographies fit?
- Initial tickets: how many companies, at what cheque size, against what minimums?
- Follow-on reserve: how much held back, and what evidence justifies using it?
- Pacing: over what period, and when do I review?
- Concentration limits: maximum exposure to one company or one shared risk
- Process: what diligence, decision notes and portfolio updates will I keep?
It is hard to step back from a charismatic founder or a fast-moving round. Writing your reasons down gives you something to check against when the next funding request arrives.
You don’t need a big portfolio to think like a portfolio investor
You need a realistic budget, a repeatable decision process, and the willingness to say no when a compelling individual deal doesn’t fit the plan. Portfolio construction exists to keep you making good decisions across many opportunities, including the ones you haven’t met yet.
Quiz · Portfolio construction
Question 1 of 5
Budget
When setting an angel investment budget, what should you consider first?
Correct: D. The budget starts with loss capacity. Angel money must be capital you can afford to lose and leave untouched for years.
Quiz · Portfolio construction
Question 2 of 5
Diversification
Why might an angel aim to build a portfolio across multiple companies?
Correct: A. A portfolio spreads exposure so no single outcome decides your result. It does not guarantee a profit or replace diligence on each deal.
Quiz · Portfolio construction
Question 3 of 5
Reserves
What is the purpose of reserving part of an angel budget for follow-on investments?
Correct: A. A reserve is an option, not a promise. It lets you back the companies that have earned it, and decline the ones that haven’t.
Quiz · Portfolio construction
Question 4 of 5
Follow-ons
A company you backed is raising another round. What is the strongest reason to make a follow-on investment?
Correct: C. A follow-on is a fresh decision. Progress against the last round’s promises, plus sensible terms, is the case for investing again. A higher valuation on its own is not.
Quiz · Portfolio construction
Question 5 of 5
Pacing
Why might an angel spread initial investments over several years?
Correct: B. Pacing lets you learn from early decisions and avoids putting the whole budget in at one point in the valuation cycle. It does not remove the risk of correlated failures.
Month 5 complete. Nice work.
You know how to size a budget, pace your cheques, hold a reserve and judge a follow-on on its merits. Confirm your email below to log your completion, and Month 6, the final lesson, will land in your inbox at the end of the month.
Logged. You’re all set for Month 5. Nothing else to do until Month 6 arrives at the end of the month.
You need 4 out of 5 to pass
Close, but a couple of the key ideas haven’t landed yet. Retake the quiz, or go back through the lesson first, whichever suits you.