Calculating ROI Most Angels calculate their ROI in terms of their multiple returned:
if a $10,000 investment pays back $15,000 that’s a 1.5X multiple. However, this simple reporting metric fails to account for the time value of money. A 1.5X multiple over a short time is far better than the same 1.5X paid out over a long time. An alternative way to state your ROI is using internal rate of return (IRR). The IRR is the interest rate you would have required over the same period to achieve the same final lump sum payment (i.e., exit event). You can convert the multiple to IRR using the following:
Money received upon exit / Money invested = (1+R) t
where R is the IRR and t is the number of years to exit. Unless you happen to have an old HP15C kicking around, it is easier to use an online calculator (see http://www.calkoo. com/?lang=3&page=26 for a good one). Below is a table to illustrate how IRR compares to multiples over different time periods.
Calculating ROI: Comparison of IRR to Multiples Over Time
Investment
Exit $15K
Multiple
Years to Exit
IRR 50%
$10K
1.5X
1 2 5
22.47% 8.45%
10
4.14%
$10K
$300K
30X
1 2 5
2,900% 447.72% 97.44% 40.51%
10
Getting a 1.5X return in just one year is a better IRR than a 30X return paid in 10 years. However, a 1.5X return after 10 years is less than 5% IRR.
According to the Angel Resource Institute (ARI), for most Angels in Angel groups, it appears that a general guideline for an individual is to invest around $25,000 in a first round of investment. This will vary from group to group. For example, the average for the Golden Triangle Angel Network (GTAN) is closer to $42,000 per deal. In addition to this first round of investment, most Angels also reserve some money to invest in the next (usually larger) round, if the company needs and deserves it. This use of “dry powder,” or the real options approach, is explained in section 1.3. If we look in more detail at the 2014 NACO report, we find that the average Canadian Angel investment in 2014 was $384,000, but the median investment was only $160,000. This means there were a few big investments and lots of smaller ones. These stats thus tend to be heavily skewed, in Canada, by a small number of Super Angels who may invest large amounts of money that resemble those invested by venture capitalists. Only 35% of investments were made by an individual (known as a Lone Wolf). Most Angels (65%) co-invest with others, for an average deal size of about $1.2 million. Most deals involve three or four investors.
12 A Practical Guide to Angel Investing: How to Achieve Good Returns
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