Angel investors funding high-risk startups might need to back more than 100 firms to strike it rich with a single bet, according to a top US practitioner of the craft.
"Diversification is critical. Certainly the majority of investments fail entirely," John Harbison said ahead of his keynote speech today at the Halo Business Angel Network conference in Co Wicklow.
Mr Harbison is chairman emeritus of Tech Coast Angels, the largest angel investment syndicate in the US. Since 1997, it has backed 420 fledgling firms - around 100 of which have folded without repaying a penny of that investment.
But the rare winners deliver such oversized returns that a broad angel portfolio will produce profits exceeding equity investments, he said - if you can hold your nerve.
"You have to be patient in this type of investing. These are illiquid investments. You have almost no opportunity to cash out until there is finally an exit event," he said, referring to an acquisition or IPO.
"You also must have an awfully thick skin, because even the successful investments go through lots of life-threatening events."
Of the 420 startups funded by his California syndicate, 180 have produced "an outcome" - 100 collapsed, 20 exited with only a partial return to investors, and 60 produced profits - while 240 others are still in the process of growing or failing.
But three of the 420 punts have produced returns equivalent to 260 times, 235 times and 149 times the stake. "The bulk of profit comes from the few," said Mr Harbison, who made millions over the years from his investments in Apple in 1984 and Microsoft in 1986.
He ultimately banked profits of up to 1,100 times his investment on Microsoft, and 450 times on Apple.
His syndicate's recent top winner was a credit fintech firm called Green Dot that nearly folded - then struck a partnership with Walmart. Fifteen competitors had similar business ideas but folded.
His personal best performer last year was Parcel Pending, an Irvine, California-based provider of courier drop boxes for apartments.
Amazon's free provision of such boxes nearly killed the firm, he said, until Parcel Pending launched refrigerated drop boxes for perishable food deliveries. That put the small firm ahead of Amazon just long enough to be bought by a French firm, and earn Mr Harbison a 2,000pc return on his investment.
Mr Harbison said his syndicate produces three annual funds that allow investors to buy units for $10,000 (€9,000) each - and gain stakes in potentially 40 firms.
He said angels should avoid rigid metrics for identifying the next big thing. For example, they should not stick to startups led by executives with previous CEO experience.
"You would have missed out on Bill Gates at Microsoft, Steve Jobs at Apple, Mark Zuckerberg at Facebook and Jeff Bezos at Amazon - all guys who had never been CEOs before founding the four largest market-cap companies in the world."
He said wealthy investors could draw comfort even from duds.
"When firms become worthless, you can offset those losses against taxes," he said. "Every year, you get write-offs."