The Mathematically Correct Way of Calculating Early Stage Startup Valuations
Executive Summary
The objective reality of the technology Angel investing is that a tiny minority of Angel investments produce huge returns, while the vast majority end up as flops.
Most Angels appear to have convinced themselves that if they just (1) diversify their Angel Investments portfolio sufficiently, and (2) insist on the industry-standard “risk premium” from the founders when negotiating the equity %, then their portfolios will have sufficiently high statistical probability of ending up being profitable within a few years.
The objective statistical analysis does not support such optimism, because a portfolio containing a relatively small number of companies (around 10 or even less) in many cases will have less than 10% probability of not losing most of the money eventually.