Do Angel Investors Make Money?

July 23, 2013

I was doing some research for a talk to a group of people who were planning to star angel investing and came across some interesting research on angel investor returns.  I thought I would share some of the observations that make sense here as well as some of the concerns I had over the accuracy of the data.

The 2007 Kauffman study of Returns to Angel Investors and related studies are the most data driven analyses of angel investing that I have seen. Some of the conclusions are a little surprising to me (like the low percentage – 30% –  of follow on financing participation by angels) and many of the conclusions feel directionally correct.  To me, the most important, but not surprising, conclusions from the Kauffman study were in the passage:

We also evaluated three factors that appear to impact these angel investors’ outcomes:

  1. Due diligence time: More hours of due diligence positively relates to greater returns.
  2. Experience: An angel investor’s expertise in the industry of the venture in which they invest also is related to greater returns.
  3. Participation: Angel investors that interacted with their portfolio companies at least a couple of times per month by mentoring, coaching, providing leads, and/or monitoring performance experienced greater returns.

On the other hand, I don’t know if I believe the exit multiple average of 2.6x in 3.6 years; it concerns me is that the data are self-reported so probably does not include the angels who lost money and are out of the market.  I see a lot of one time angels.  Another concern that I had is that there is likely a very wide gap between the high and low performing angels (just like with VC funds). Also, the study authors note that 7% of the exits account for 75% of the returns so one question is how evenly distributed are those 7% by angels, industry and geography.  Since there is no analysis of returns versus geography if may be that some regions are better for angels (in recent years, silicon valley angels have done very well so the returns for mid-continent angels might be somewhat lower).  Finally, these results are from 2007 – angel and vc investing has changed dramatically since then with more super angels and fewer active venture funds in many sectors so there is the question of whether this study is still relevant in 2013.

I also found a more recent statistical analysis of the same 2007 data that resulted in the following observations:

Median returns vary substantially with portfolio size. Going from 5 investments to 10 investments increases median return by 68%, from right around 1x to nearly 1.7x. There are diminishing returns to growing portfolio size. Going from 10 to 15 increases median returns by another 40%. Doubling portfolio size from 15 to 30 adds another 50% but then in takes going all the way to a whopping 125 company portfolio to triple median returns compared to the 5 company portfolio. Similar conclusions apply with respect to other metrics. The probability of getting a return that’s greater than 2x doubles (from 34% to 69%) as one moves from a five company portfolio to a 50 company portfolio.

The data unequivocally suggest that playing like a super angel or an active seed fund as opposed to dabbling with the occasional angel investment is a key strategy to consider if financial returns are important. The data also call into question the behavior of some angel groups that do just a few investments per year.

The question over the absolute values of the returns aside, the idea of a larger portfolio in order to capture one of the 7% of giant winners makes total sense.  Conclusion: Angels should invest in areas where they have some expertise, do a lot of diligence and build a large enough portfolio to capture a few big winners – just like VCs.


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