How profitable is Angel investing?

How do you read this article?

  • This article is based on research of Angels investors.
  • The research comes from three sources, listed in the Further Reading section. The research was done at different points in time by different groups.  Thus, the findings should be viewed as illustrative.
  • All of the research is U.S.-based, with no Canadian facts.
  • If I uncover Canadian statistics, I will update this article.

What is Angel Investing?

  • Angel investors provide capital after friends and family and before venture capital.
  • A single Angel investment round (with multiple Angel investors) can range from $100,000 to $1,000,000.
  • There can be multiple rounds of Angel investments.

What are the financial results?

  • 10% of all exits generated 85% of the cash, 70% of exits lose some or all of the investor’s cash.
  • For an investor with a portfolio of 11-20 companies, 12% of the companies will be positive exits (i.e. receive more capital than invested), and 39% of all exits will be positive.
  • An exit can be: company sale; shares acquired by future investors; or company being wound-up.
  • There are many zombie startups. The companies continue to exist, but there is no exit.
  • To make money, you have to achieve that one exit that makes anywhere from 5 to 30 times your investment.
  • The average hold time is 4.5 years, but very successful exits often take much longer.
  • The IRR is 22% for the overall pool of Angel investments. This excludes out-of-pocket costs for due diligence and ongoing management of your portfolio, and assumes your time has no value.

What do you have to do to make money?

Spend more than 40 hours on your personal due diligence.

  • Spend more than 20 hour of due diligence time for each potential investment.
  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.9 X capital.

Stay involved with the company: provide coaching and mentoring, be the lead investor, serve on the advisory board or board of directors.

  • Angels who interacted with the company twice a month achieved a 3.7X return in 4 years.
  • Angels who interacted twice a year received a 1.3X return
  • Interacting more than twice a month does not improve returns. Note that I’ve meet with accelerators and incubators which have weekly meetings with startups.  I suspect that few Angel investors have this detailed a process.

Have a portfolio of companies.

  • Your return depends upon the 10% of exits that generate 85% of returns.
  • The average successful Angel investor has 12% of all investments in Angel companies.
  • Angel investors will hold 23% of the equity, prior to Venture Capital funding.
  • The average cheque will be about $35,000.

Select founders who recognize they’ll become minority owners.

  • Angel investors will hold 23% of the equity prior to Venture Capital funding.
  • Investors will own 2/3 of the equity by the time a liquidity event occurs.

How many startups actually get Angel funding?

One large Ontario Angel investing group told me that 1% of the companies that apply for an investment, actually receive an investment.

Conclusion

You can make money as an Angel investor if you stay closely in touch with each of your portfolio companies after in-depth due diligence.

Further reading

The following are the sources of the statistical research into Angel investing returns:

“The American Angel November 2017”, The Wharton Entrepreneurship and Angel Capital Association

https://www.angelcapitalassociation.org/data/Documents/TAAReport11-30-17.pdf?rev=DB68

Robert E. Wiltbank, PhD and Professor Wade T. Brooks , “Tracking Angel Investor Returns Halo Report 2016,” Angel Resource Institute and Willamette University

https://angelresourceinstitute.org/reports/angel-returns-full-version-2016.pdf

Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf