As an investment asset class, we know that Angel returns can average 2.6X the investment in 3.5 years – an internal rate of return (IRR) of about 27%. This compares very well with other asset classes (Wiltbank). However, looking only at averages can be very misleading!
Distribution of Returns by Venture Investment
60
10% of Investments Produce 90% of Cash
50
UK: Overall Multiple: 2.2X
40
Holding Period: 3.6 years; Approx.: 22% IRR
30
US: Overall Multiple: 2.6X
20
Holding Period: 3.5 years; Approx.: 27% IRR
10
10–20X
30X
< 1X
1–5X
5–10X
Exit Multiple
Orange Bar: UK % of exits in that category Source: Wiltbank , Returns to Angels in Groups . Angel Capital Association
Blue Bar: US % of exits in that category
The distribution of returns shows that over half of all investments never return their original capital or fail completely (less than 1X, or the first bar in the graph above). Only 7% of exits return more than 10X the capital – thus creating over 75% of total portfolio investment returns. 10% of exits produce 90% of total returns. Since only one in ten investments will account for almost all returns, successful Angels must use a portfolio approach. (This need for a portfolio to reduce risk is the same as the reasoning behind mutual funds or index funds.) How Do Angels Invest? Visible Angels are Angels who participate in an Angel group and/or who want to be found by entrepreneurs who are looking for investment. Because we know who they are, they are counted in annual reports, and governments can track the important role they play in stimulating the economy. It is estimated that, in Canada, there are 10 times more invisible Angels who do not want to be found. We know this from company tax returns and because of comparisons with the number of US Angels, who tend to be far more visible than Canadian Angels. NACO estimates that there are 20,000 to 50,000 individuals who make Angel investments each year in Canada. (NACO National Angel Summit, 2015) NACO’s 2014 Report on Angel Investing Activity in Canada (Schure & Dodaro) provides an array of statistics about Angel investing, and it is well worth the time to review its contents. You can benefit from knowing which sectors are popular, which Angel groups are performing well, and what deal structures they are using.
11 A Practical Guide to Angel Investing: How to Achieve Good Returns
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