Angel Investing: Patience and a Portfolio Required

The latest Angel Resource Institute (ARI) survey of returns for nearly 250 angel investments reveals the number of projects failing to breakeven during their liquidity events is up sharply since before the Great Recession – nearly 35 percent more are losing money for their angels than ARI found in a 2007 survey.  In 2007, 52 percent of liquidity events failed to reach 1x, while that figure has grown to 70 percent in 2016. Add to that, angel investors are holding companies in their portfolios 12 months longer on average, 4.5 years in 2016, than they did in the first study. A third strike for the faint of heart might be the internal rate of return dropping five points, down from 27 percent in 2007 to 22 percent in 2016.  Do these trends provide insight on how best to advise crowd funding participants?

A portfolio approach would be the first takeaway for nascent investors because those same angels in the new survey saw an average 2.5 times return on their total investment from all of their liquidity events when viewed in aggregate, as portfolios. Approximately 10 percent of angels’ individual investments on average saw exit multiples of 5x or greater in the 2016 survey, offsetting the losses incurred when 70 percent of their portfolios returned less than the angel’s investments. In the 2007 survey, the aggregate multiple was slightly higher, at 2.6 times the angel investment, and the number of deals yielding larger returns was slightly smaller. (The 2007 return of 2.6x benefitted from fewer failures and 30 to 35 percent of deals in 2007 provided a 1x to 5x return, compared to less than 20 percent of 2016 returns).

Patience would be the second important piece of advice for future angels. The ARI research finds that the largest returns – those with multiples of higher than 30X – were also held, on average, 11.0 to 12.2 years. Even those companies yielding a multiple of 10 to 30 times original investment were held 8.0 to 9.8 years.  These time commitments may have been influenced by the Great Recession; 91 percent of the liquidity events and at least 30 percent of initial investments included in the 2016 survey occurred during the recession.

A third piece of advice would be do not plan to go alone. Venture capital became involved in two-thirds of the companies included in the 2016 survey – twice the rate of involvement identified in the 2007 study – and one or more VCs were involved with 70 percent of the ventures yielding positive returns. In contrast, VCs were only associated with 45 percent of the failing ventures.  By the time of the typical venture’s liquidity event, the survey found investors (both angels and VCs) owned two-thirds of the company’s equity. 

The 2016 survey was conducted for ARI by Dr. Robert Wiltbank and Professor Wade Brooks.  Their research was presented at the annual summit of the Angel Capital Association and is available at: http://www.angelresourceinstitute.org/returns-to-angels-2016.aspx.