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Study Finds Angel Groups Receive Returns Consistent with Other Investments

December 12, 2007

By nature, angel investing is a risky endeavor. Angels are often involved with unproven seed- and early-stage companies and are frequently the first outside investors to become involved in a new venture. Despite these risks, a report released by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation argues that angel investors working through investor groups often achieve attractive returns. Although only about half of all angel deals result in a profitable return, angels who maintain a portfolio of investments and have the resources to devote to extensive due diligence and company oversight frequently see returns that are competitive with other types of equity investment.


The authors of the report, Robert Wiltbank of Willamette University and Warren Boeker of the University of Washington, conducted a survey of 539 active angel investors to find out more about their background and the results they had seen from their investments. Since there are no legal reporting requirements for angels, the sample was limited to investors who are associated with angel groups.


On average, these investors engaged in slightly more than one deal a year between 1990 and 2007, the period covered by the survey, and had about nine years of investment experience. Three-quarters of all investments were directed toward seed- and start-up-stage businesses. Their median investment was $50,000, including all follow-up investment. The distribution of investments between sectors was similar to that of the venture capital industry, with software receiving the most attention followed by health/biotech and business products and services.


About 61 percent of angel investors in the study garnered overall returns that exceeded their investments. Only 48 percent of individual exits earned a full return on the investment, however, indicating that investors who maintain a portfolio of investments tend to accumulate greater returns than one-time investors.


Wiltbank and Boeker also evaluate the impact of investor-side factors that can significantly affect the profitability of an exit. Those include:

  • Amount of time spent on due diligence;
  • Whether or not the member angels possessed expertise in the companies' industry;
  • How much involvement the group had with the company after investment;
  • Whether or not the group made any follow-on investments; and,
  • Involvement of venture capital firms.

Due diligence appears to be particularly vital to successful investments. Angels in the survey reported that the median length of time spent on due diligence for any given investment was about 20 hours. The average return to investments that received more than 20 hours of due diligence is more than five times higher than other investments. Active involvements with portfolio companies and industry expertise also have a strong positive impact on returns.


Read "Returns to Angel Investors in Groups" at: http://www.kauffman.org/pdf/angel_groups_111207.pdf