National Association of Seed and Venture Funds
| MoreLIP: Returns to Angel Investors in Groups |
11/13/2007
Preview:
The first ever academic report on returns from angel group investing offers both encouragement and caution for the hundreds of individuals just getting their feet wet in the escalating role of angel investing as the alternative to institutional seed capital.
Article:
The first ever academic report on returns from angel group investing offers both encouragement and caution for the hundreds of individuals just getting their feet wet in the escalating role of angel investing as the alternative to institutional seed capital.
Rob Wiltbank of Willamette University and Warren Boeker of the University of Washington, sponsored by the Angel Capital Association and the Ewing Marion Kauffman Foundation, scrutinize more than a 1100 exits by 539 angel investors to discover an average return of 2.6 times their original investment in just 3 ½ years, amounting to an impressive IRR or 27%, rivaling even the most successful venture capital firms. Yet, like institutional venture capital they recorded a loss of capital in just over half the exits. In fact a tiny 7 percent of the exits (about 80 of the 1139) scored more than 10-times their investment, accounting for 75% of total returns.
Wiltbank & Boeker also report that the more time invested in due diligence, the more experience an angel had in the industry of the company seeking capital, and the more interaction between the mentoring angel and the invested company, the more likely the higher return. Each of these factors is explored in more detail in the report.
Nearly half (45%) of the companies in which the angels invested were pre-revenue. As the report concludes, “while clearly not for the faint of heart…angel investing can be done well in the pursuit of legitimate financial returns.”
This report, “Returns to Angel Investors in Groups” is a milestone.
It is the first, and thus a baseline, for more and deeper examination of angel group investing. That alone makes it of significance to the score of states that are encouraging with incentives more angels participation in their economic growth strategies. This report, at the least, says there is reason for optimism. And it affirms that the states are pursuing a rational strategy in trying to provide seed and start-up capital in the absence of institution venture capital activity.
It hopefully encourages even greater cooperation among angel investors to share future results and to build on the knowledge base and best practices in angel investing. The voluntary sample size in the study is relatively small; perhaps due to the fact that angel group investing, while not novel, has in recent years grown exponentially and many of the investments are not yet at, or even near, exit stage. The results shown in this report are, therefore, more likely weighted to those angels groups long of tooth and deep of experience.
It sends a signal that angel investing is challenging, requiring serious work in the launch and growth of new economy companies. It takes due diligence. It demands mentoring.
And, dare we say, “Long live the angels.”