Access to returns to angel investors
Capital and Markets in groups
Identifying the returns from
investments made by angels
affiliated with angel organizations
The following is a synopsis of the largest study on the financial returns
Angel Gnvestors
Returns to study, published 8 November
of angel investors in North America. This after 2004, and onlyin percent of the exits occurred
I roups venture by the angel investor (e.g., $500,000 returned
2007, was funded
on a $100,000 investment wouldby the Ewing Marion Kauffman Foundation and the initial investments
be a 5X multiple). before 2000. Ninety percent of the
in Angel Capital Education Foundation and occurred afterby Robert 65 percent were initiated
We gathered data from the angels on the amount of
cash they originally invested in each venture, plus any
conducted 1994, and Wiltbank of
after 1999.
Willamette and the years in Warren Boeker of the University of Washington.
follow-on investment(s), University andwhich they
made those investments. Investors also identified the
year and type of exit, along with the amount of cash
Angel from the venture both during the
they received backinvestors are high-net-worth individuals who make equity investments
investment period and at that exit event. These details
Novembe
r 2007
Our primary goal up. In
directly into growing companies, usually as the ventures are starting in this research
form the basis of the multiples and rates of return
was to organizations
reported inrecent years, individual angels began forming angel group identify the returns from
this study.
h.D.
diligence and make by angels
in due investments made larger, moreaffiliated
iltbank, P
Robert W
Willamett
e Univers
willamett
ity
e.edu detailed in individual quite recent.
The exitswith otherthis study are angels to share
Wiltbank@
r, P h . D . Sixty-two percent of the exits or closures occurred with angel organizations.
sophisticated investments. Despite the growth of angel group investors, little
oeke
Wa r r e n B ington
y of Wash
Universit on.edu
.washingt
W Boeker@u
research has been conducted on their financial performance or demographic
profiles.
distribution of group-
The study analyzed results from 86 organized angel investor groups
throughout the United States, involving 538 individual angel group investors
Download this study:
affiliated angel returns
who have experienced more than 1,130 exits in which companies that had
received the investments were acquired, went public, or were closed.
www.kauffman.org/angelstudy While overall returns on group-affiliated angel multiple of at least 1X, showing the advantage of
Key finding: Angel investors participating in organized groups achieve an maintaining
investments average to a 2.6X return on investment making multiple investments (that is,
after 3.5 years, the outcomes are not evenly
average 27 percent internal rate of return. a portfolio).
distributed among the investors and ventures. • Of course, this means that 52 percent of all
Search for these related studies • Forty-eight percent of all the exits returned more venture exits are at a loss, and 39 percent of the
capital the angel had 2.6 times angel in 3.5 in this study is portfolios of
than the • Exits generated invested. their invested capitalinvestorsyears, whichhadin line
at www.kauffman.org: with other achieved returns equity deals. investment exits with a less than 1X multiple.
• Seven percent of the exitstypes of private of
more than 10X. The accompanying chart details the distribution of
• Finding Business Idols: A New Model to • Seven percent of exits had at least returns across times categories
• While only 48 percent of ventureexits generated returns above 10growingtheir initialof multiples.
Accelerate Start-Ups investment.
a 1X return, 61 percent of investors had an overall
• State Strategies to Promote Angel
Distribution of Returns by Venture Investment
Investment for Economic Growth
60.0 3 years
50.0 Overall Multiple: 2.6X
Contact:
Barbara Pruitt Avg. Holding Period: 3.5 years
Percent of Total Exits
40.0 3.3 years
816-932-1288 30.0
bpruitt@kauffman.org
20.0
Kauffman Foundation
4.6 years
10.0 4.9 years 6 years
0
30X
www.kauffman.org Exit Multiples (over)
R E T U R N S T O A N G E L I N V E S T O R S I N G R O U P S
ligence was sixty hours per investment. For
arison, formal venture capitalists may spend
l months on due diligence, though the actual
er of hours spent working on diligence for a Angel investors reported the median
venture investment is less clear. It is worth length of due diligence prior to Access to Capital and Markets
g that length of time may not be the only
investing was twenty hours.
tant factor in due diligence; future research may
Industry Expertise Impact of Time in Due Diligence
The
A choice facing angel groups is the extent to which they will invest
within or beyond the areas of industry expertise of their member
angels. Focusing investments in a single industry or on a particular
70.0 Median: 20 hours
product may simplify their due diligence work and lead to more
60.0 Avg. 26% involved more than 40 hours
insightful evaluation of the factors critical to the venture’s success, as
well as provide opportunities for connecting that venture to new
50.0
talent and opportunities. However, geography or business conditions Other findings: The study also assessed how the following
Percent of Exits
Overall Multiple for High to capitalize on its
may not bring deal flow to the group that allows it Diligence 5.9X (4.1 years)
40.0 strategic factors impacted the angel investors’ outcomes:
talent or experience. Angel investors may have more opportunities to
Overall Multiple for Low Diligence
invest outside, rather than inside, their areas of expertise. 1.1X (3.4 years)
30.0
Investors reported their years of experience in the industry of each
20.0
• Due diligence: Investors experienced better returns when they
venture in which they invested. The study indicates that half of the exercised more due diligence.
10.0
investments made were unrelated to investors’ industry experience.
When ventures were related to an angel’s expertise, the angel typically
0 • Industry expertise: Returns were nearly double for investments
had fourteen1Xyears of relevant experience. Analysistoindicates that
30X
expertise had a material impact on angel investors’ earned returns. in ventures where the investor had related industry expertise.
Investment multiples were twice as Multiples
Exithigh for investments in ventures
connected to investors’ industry Diligence
Low expertise.High Diligence
• Participation: After an angel makes an investment, his or
her participation in the venture is significantly related to that
venture’s returns.
Participation (Interaction with Portfolio Companies)
Relationship to Industry Expertise Follow-on Investment
R E T U R an S T O A N an E L I N V E hisTor herSparticipation O U P S
After N angel makes G investment, S O R I N G R in the • Follow-on investing: In ventures whereinvestment in
5
In this sample, angel investors made follow-on
follow-on investments
venture—through mentoring, coaching, financial monitoring, and were made, 70 percent of which they exited. at a loss.
29 percent of the ventures fromthe exits occurredFollow-on
making connections—is significantly related to that venture’s
70.0 investments were related to lower returns. This is not a measure of
50% of deals were not related
outcomes. This study measured the frequency of post-investment whether any follow-on investment was made, just whether the same
When on a scale from 14 years of experience
participation for each investment related, they typically haddaily through
60.0
angel investor made a follow-on investment in the venture. Of course,
weekly, monthly, quarterly, annually, or rarely/never. the choice to not invest again to help keep a struggling venture going
50.0
Respondents reported meeting with each venture a couple of times can immediately lead to its demise.
Percent of Exits
per month (between weekly and monthly) on average. Angel investors
40.0
If the choice is to let a firm close or to follow-on with more capital,
reported their primary activities included mentoring/coaching, strategic sometimes the follow-on investment still can be a good choice. To
30.0
consultation, and monitoring financial information. that point, the overall multiple for ventures that did receive a follow-
In
20.0 the data collected for this study, angel investors who interacted on investment from the same angel investor is still positive, at 1.4X,
with the venture a couple of times per month experienced an overall but is lower than the 3.6X for those that did not take a follow-on
10.0
multiple of 3.7X in four years. In contrast, investors who participated investment. It is risky to make follow-on investments, however. In this
a couple of times per year experienced overall multiples of only 1.3X sample, 68 percent of the exits that took follow-on investments
0
in 3.6 years.1XThis relationship does 5X to 10X
30X
10X 30X resulted in a loss of capital.
participation beyond a couple of times per month would be better.
Rather, as frequency increases, the Multiples
Exit quality and types of participation
High of participation.
become more important than the frequencyIndustry Expertise
Low Industry Expertise
The Impact of Participation Follow-On Investment from Same Angel Investor
60.0 70.0 30% of deals had follow-on investments
High = 1 or 2 times per month
60.0 No 3.6X (3.3 years)
50.0 Low = 1 or 2 times per year
50.0 Yes 1.4X (3.9 years)
40.0
Percent of Exits
Percent of Exits
High 3.7X (4.0 years) 40.0
30.0 Low 1.3X (3.6 years)
R E T U R N S T O A N G E L I N V E S T O R S I N G R O U P S 30.0
20.0 20.0
10.0 10.0
0 0
30X 30X
Exit Multiples
Exit Multiples
Low Participation High Participation Follow-On Yes Follow-On No
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