OK, all you angel investors – or those who want to be ones: This new data may encourage you to rethink your strategy.
Angel investors – responsible for $24 billion in capital funding, according to the Angel Capital Association – face greater risks of exit failure now than 10 years ago, according to a new study by the Angel Resource Institute. And successful exits are taking longer to materialize. The study was released on the opening day of the Angel Capital Association Summit in Philadelphia.
The ACA called the results “fascinating.”
However, bigger payoffs can help compensate for failures.
So what are the chances of failure as defined by failing to get 1x return?
Try 70 percent, up from 52 percent a decade ago.
And are returns greater than institutional venture capital deal makers?
Here are the answers from the report, the first since 2007 and funded by the Ewing Marion Kauffman Foundation and the NASDAQ OMX Education Foundation:
- “Failure is the most likely outcome from any one investment, but larger wins continue to make the rate of return attractive.
- “The investment holding period increased by a full year, to 4.5 years on average.
- “The failure rate, exits at less than a 1X return of capital, increased to 70% of all outcomes, up from 52%.
- “Bigger wins commonly took 9 or 10 years to complete.
- “The cash on cash multiple works out to 2.5X.
- “The overall IRR [investor rate of return] is approximately 22%, compared to 27% in the earlier study.”
Robert Wittbank, one of two researchers who compiled the data, sees similar results for angels as seen by VCs.
“These returns continue to compare favorably to those of formal venture capital investors,” he says. “Data from Cambridge Associates suggests a comparable early stage VC multiple at 2.1X vs. the 2.5X here, but with a higher IRR estimate at 29% driven by faster exits and the inclusion of book value estimates for ongoing investments.”
“These results are fascinating and important to track as the angel community works to get smarter on the tactics and practices that lead to more of the top outcomes,” said ACA Executive Director Marianne Hudson, in a statement released at the summit.
“We looking forward to leveraging these findings with the results of The American Angel campaign, which is currently underway, to get a more complete picture of who American angels are and how they invest, which is critical for entrepreneurs, economic development entities, private market makers, regulators and legislators to understand.”
However, there’s also much to be learned about angels, the ACA pointed out.
Outside “financial studies like this, precious little is known about the 200,000+ American angels who wield so much economic influence in the U.S. startup economy by investing more than $24B in startups,” the ACA noted.
Trying to fill in gaps of knowledge, the ACA is working with the Wharton Entrepreneurship aiming to “complete the first comprehensive study to understand who angel investors are, how they became angels, and what factors influence their investing activity.”
Angels are encouraged to participate. (Visit: http://www.TheAmericanAngel.org.)
Results are expected in November, according to the ACA.
Read more about the Angel Resource study at: