Editor's note:Dr. Robert Wiltbank, is a professor at Willamette University, where he and Wade Brooks run an angel fund run by second-year MBA students. He serves on the board of directors of the Angel Resource Institute and is a partner at Montlake Capital (an advanced stage growth capital fund) and Revenue Capital Management (a fee-based lender). He is co-author of two books and numerous scientific articles.
I started studying angel investment returns about 10 years ago because I had a problem I couldn't solve: the investment world seemed convinced that angel investors were idiots. Conventional wisdom held that they made ill-advised investments in very fledgling companies, most of which were doomed to fail. And while they were on the verge of success, savvy "professional" investors simply stepped in, swiped them and reaped the real benefits. Furthermore, the Angels faced a selection problem: all the best entrepreneurs and opportunities would naturally gravitate towards the best VC funds, leaving only the "waste" to the Angel investors.
What then? Are angel investors just ignorant philanthropists or legitimate business investors?
Through research supported by the Kauffman Foundation, NESTA (a UK-based corporate foundation), the University of Washington and the University of Willamette, I have compiled the largest existing dataset on investor financial returns. I didn't seem so naive or incompetent. Although they are not professional investors, most angels are very successful in their own right, mostly as a result of their own ventures. His first-hand knowledge of creating new businesses and new markets seemed very relevant to successfully investing in other entrepreneurs working to do the same.
The best estimate of angel investors' total return from this data is 2.5 times their investment, although the probability of a positive return on each investment is less than 50%. This is absolutely competitive with VC returns.
interested inAndy Rachleff's article suggesting that angel investors don't make moneyit was extensive. The play is thought-provoking and has some really good points. First, everyone must understand that angel investing is a high risk investment; it really is a "home run" game like formal venture capital investments. Second, even with angel investing, an investment portfolio is a great approach. Third, whenever you make risky investments it is a great principle to limit your bet size and make sure you don't invest too much of your wealth in aggressive positions. Valuable lessons from Andy's personal experience investing in venture capital firms in Silicon Valley.
Fortunately, there is now good data on angel returns in Silicon Valley and nationally, and while more research is needed, the data suggests that angel investors can, and often do, make money. Of course, there are more and less capable angel investors, just as there are formal venture capitalists, but as a group they are definitely not ignorant philanthropists. They seem to be generating reliable returns as business investors.
With these data, we don't need to derive from the experience of venture capitalists. Says Andy, "When the average VC fund is barely making money and initial investments are even less attractive opportunities than what VCs are chasing, then the typical angelic returns must be dire." They just aren't. Assumptions like this are problematic because early-stage risky investing does not take place in an efficient market. Angel investors generally act differently than venture capitalists, and the fact that venture capitalists have abandoned the initial investment does not necessarily mean that they have done so because the initial investments are inherently less attractive. (A plausible alternative explanation for why VCs abandoned early-stage investments is a consequence of fund size growth, NOT a reduction in the number of attractive early-stage opportunities.)
Let's take a look at the actual data. (If you're really interested in data, you can read two reports detailing data collection efforts in the US and UK, and a more detailed description of the distribution of results:Kauffman Foundation Return of Angels StudyjInvestment firm Angel von NESTA🇧🇷 In addition to these two professional reports, you can read moreformal academic workon how entrepreneurial experience affects the return of angel investors.]
The common multiple of the data presented in the graph is 2.5 times the angel investment (i.e. $100,000 invested would generate $250,000). It is based on over 1,200 angel investor investments collected separately in North America and England over a 15-year period. It's not very concentrated geographically, either in the 1998-2000 bubble or in any sector. The distribution of returns for the different US and UK samples are nearly identical, a useful check on the robustness of the original North American data. Data does not include “book value” estimates. (If you want more details on these things, you can check out the full reports.)
Here are some important things to keep in mind:
- With any UNA investment, an angel investor is more likely to lose their money, i.e. earn less than a 1X return. It's risky. However, once investors had a portfolio of at least six investments, their average return exceeded 1x. Irving Ebert of the Ottawa Angels ran an excellent Monte Carlo simulation on this data and found that executing about 50 trades is roughly equivalent to overall 95th percentile performance. It is clear that most traders will fall somewhere in between. Angel investors should probably try to make at least a dozen investments, but this is just a general rule of thumb. This is crucial: every investment must be madeas if it were your onlyoneThe bar cannot be lowered so that you can build a bad portfolio faster.
- Cash production is heavily focused on winners; 90% of all cash returns are produced by 10% of the outflows. This is essentially the same concentration as venture capital. The second biggest "bucket" of cash returns is in the high volume but low multiple group, the 1X to 5X category. However, it is important to note that this is not soexactlythe same as formal venture capital. These returns happened everywhere geographically (NOT across the Bay Area or Boston), they happened across industries, and most importantly, without accompanying VC investment. In fact, venture capitalists ended up investing in only one in three companies, and the companies they invested in producedlowerReturns than those venture capitalists didn't invest in.
- When you add it all up, these angel investors (in the US and UK) generated a gross multiple of 2.5 times their investment over an average time of about four years. This return is absolutely competitive with formal venture capital returns. Since the margin of error around these estimates is greater than the risk source and risk expert data, I'm not going to claim that the Angels "outperform" formal venture capitalists. But the assumption that they are cheating themselves out of making money with angel investments is simply not supported by the data.
Angel investors seem to bring more diversity to strategies when investing and building companies compared to formal venture capital. Their entrepreneurial background (85 percent of them are "paid" entrepreneurs) and the fact that they invest their own money takes a step back from the notion that they are just "hacked" VCs. They differ from formal venture capitalists. Some investors focus on capital efficiency, others on shooting for the moon with all the capital they can get. Some actively pursue VC participation, while others consciously avoid VC participation. Many other approaches are constantly being developed.
But before we stray too far from hard data, this is what the Angel Resource Institute (ARI) has been building over the past year or two.HALO report, a quarterly report on angel investor activity in the US. The data on valuations, activity levels, geographic and industry distribution is very interesting and will also provide a quarterly indicator of angel investment returns over time. In the first half of this year, valuations were not high at around $2.7 million before the money, and round sizes are hovering around $550,000 in a variety of sectors. Again, the image seems more representative of angels as legitimate commercial investors. It's also worth noting that angel investing is more widespread across the country than formal venture capital; it's not very concentrated in the Bay Area.
To keep things in perspective, it's important to remember that most companies, even large ones, don't do this.It ismake venture capital investments. Nearly a third of IPOs come from venture capital-backed companies. While this is really impressive considering that VCs invest in less than 1% of startups, it still means that two out of three IPOs come from companies that never had VCs. Angel investors, like savvy entrepreneurs, don't necessarily see the growth of formal venture capital investments as a measure of success.
Nobody celebrates a loan, but for some reason some people like to celebrate a risky investment. Best case: Equity (Angel or VC) is a great assetwith a part of the financial obligation🇧🇷 Worst case scenario: an albatross around the neck...with a part of the financial obligation.
Like angel investors, venture capitalists want their money back multiplied by 50 if they can get it. The idea that angels are dumb while venture capitalists have cornered the market by building big companies is simply not borne out by the data. Now let's get back to the business of selling more product and less inventory!
It's not uncommon for an angel investor to expect a 30% return on their money. Angel investors will have a ROI expectation in mind as part of their exit strategy. This is the point in time when they sell their equity in the company to make up their initial investment and any profits.How much money do angel investors make? ›
Angels typically invest $5,000 to $150,000 per startup. In return, they receive an equity stake in the company. That averages around 20% but can rise to as much as 50% of a young company. Investors and entrepreneurs may negotiate funding and equity details directly, especially in the earliest ventures.How much return does a typical angel investor expect from his or her investment? ›
The effective internal rate of return for a successful portfolio for angel investors is approximately 22%.3 Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures.What percentage should an angel investor get? ›
A: Angel investors typically want to receive 20% to 25% of your profit. However, how much you pay your angel investors depends on your initial contract. Hammer out these details before they give you any money, and have a lawyer draw up a contract, which will make your angel investors feel safer in their investment.Are Shark Tank angel investors? ›
The person who invest in others people (shark tank) are they venture capitalists or angel investors?? And if so reason? In the current show format, they are angel investors.Can you get rich from angel investing? ›
Angel investing isn't a way to get rich quickly. For the startup to grow to the point where investors can make a rewarding exit, it can take seven to 10 years or more. It's important to invest only money you won't need to use in the near future, but also money you're not too scared to lose.How much return do investors expect? ›
Expectations for return from the stock market
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average.
Size of investment - Venture capitalists generally invest $2 million and up in a financing round, while individual angels make much smaller investments ($5,000 to $100,000). Angel groups can make investments in the mid-range, between most individual angels and VCs.What is the biggest benefit of an angel investor? ›
The big advantage is that financing from angel investments is much less risky than debt financing. Unlike a loan, invested capital does not have to be paid back in the event of business failure. And, most angel investors understand business and take a long-term view.How much equity do angel investors ask? ›
Angel investors in India typically take up 20-30% of equity for investment worth INR 1-3 crores.
Back when Uber's focus was still black cars, Jay-Z agreed to invest $2 million in the fledgling company. That's a massive outlay for an angel investor, particularly an entertainer.Can an angel investor steal my idea? ›
What I can assure you is active angel club investors and venture capital funds are not likely to steal your ideas and morph into your main competition. The purpose of startup and early stage investors are to fund high-potential companies like yours, not operate them.Who is the most famous angel investor? ›
Making money as an angel investor is possible, but it's also risky and you could lose all of your money. Anywhere from 75% to 90% of startups fail. Most angel investors allocate a subset of their overall investment portfolio to angel investments.What percentage of angel investments fail? ›
50%-70% of individual angel investments result in a loss of some capital, according to the most authoritative academic data; the same is true for VC deals.How long does it take for angel investors to make money? ›
It isn't unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years. When you are being held to this type of standard, the pressure to generate may be intense.Is 3% a good return on investment? ›
What Is a Good ROI? According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks.Is a 20% return on investment good? ›
A 20% return is possible, but it's a pretty significant return, so you either need to take risks on volatile investments or spend more time invested in safer investments.Is 5% a good rate of return? ›
In the case of the stock market, people can make, on average, from 5% to 7% on returns. According to many financial investors, 7% is an excellent return rate for most, while 5% is enough to be considered a 'good' return.Is Shark Tank venture capitalist or angel investor? ›
If you were wondering if Shark Tank is venture capital or angel investment, now you know that the investments Sharks make on the show are by Angel investors, who are wealthy individuals who invest their own personal money in early-stage companies.
The show features a panel of investors called "sharks," who decide whether to invest as entrepreneurs make business presentations on their company or product.Is Mark Cuban an angel investor? ›
About Mark Cuban
Mark Cuban is an Angel Investor. Prominent investment areas are Real Estate, Web 3.0, Fin-Tech and has invested in startups like Polygon.
It's important to note that while the sharks are paid to be on the show, the money they invest in the entrepreneurs' companies—if they choose to do so—is all their own. The money that Shark Tank investors offer is their own money and is not provided by the show.