Angel investors are accredited investors that invest in startup businesses. Most angel investors are current or previous business owners. They make an enormous impact on the economy through the role they play in supporting new businesses; but it is not a widely accepted, mainstream investment strategy. The largest body of research regarding average angel investor returns was performed by the Kauffman Foundation. The data was collected from 538 investors, making 3,097 investments with 1,137 exits or closures.
The study finds average angel investor returns at 2.5 times their investment in 3.5 years for an annual internal rate of return of 27%. However, any one investment’s odds of a positive return are just under 50 percent. This really emphasizes the importance of taking a portfolio approach to increase the likelihood positive exits that will cover investments that go to zero. Additionally, below are a few best practices (within your control) that can make a huge difference!
Angels that spent greater than 20 hours performing due diligence on a new investment averaged a 5.9 times their original investment after 4 years compared to those who spent less than 20 hours averaging 1.1 times their original investment after 3.6 years.
The second most significant factor occurred when the angel investor had industry expertise before making the investment. Angels with prior industry experience averaged 3.7 times returns after 4 years compared to 1.3 times after 3.6 years for angels that did not have industry experience. This seems really intuitive, but reinforces that investors are more likely to perform better when they invest in industries they know.
The next highest impact category was when angel investors remained actively engaged after making an investment. The investors that were board members, monitored financials, or mentored the company averaged 3.7 times returns after 4 years compared to 1.3 times return after 3.6 years.
Written By: Spencer Stensrude, Business Analyst
Disclosure: Individual investors should always conduct their own due diligence and consult with their own advisors.
Source: Angel Investor Returns Study, Kauffman Foundation 2007.