Angel investors who invest in start-ups, and then follow up those investments with more cash, end up losing money on their investment more than 70 percent of the time.
That’s just one of the facts contained in an extensive survey of the angel investors (you can download it here), and how they are performing.
Angel investors are so named because their supposed “angelic” role: They are wealthy individuals who invest seed capital in companies for them to get off the ground. They then roll up their sleeves to help the companies by doing things like writing up a business plan. The most common strategy is for angels to nurture companies until they are mature enough to take venture capital in the millions of dollars. Angels have become increasingly important in Silicon Valley and elsewhere. With the advent of cheap new internet technologies, the cost of launching companies have declined. Often the capital from these angels is all that it takes for a company to launch, and VCs investments are getting pushed to later in a company’s life-cycle. The survey was released today by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation.
When an angel is forced to reinvest in a company, it may be a sign the company is too weak to get venture capital for itself. Angels may invest again anyway, hoping to avoid their hard work ending up in failure. That’s a bad reason, and the struggling companies go out of business anyway. Angels reinvest in about a third of their deals, meaning this quite a common occurrence. In other words, they’re too angelic.
Overall, angel investors lose money on only 39 percent of their deals.
On average, they earned 2.6 times their invested capital in about 3.5 years from the date of their investment.
The survey consisted of 86 U.S. angel groups, including 539 individual investors. These investors had more than 1,130 companies get sold, go public, or close down.
The study also analyzed results based on the amount of diligence the angels reported they did on deals, their industry experience, and participation with the company after an investment is made.
Here are some of the study’s conclusions:
Due diligence time – Investors experienced better returns in the deals where they exercised more due diligence. Sixty-five percent of the exits with below-average time spent on due diligence reported a return that was less than their original investment. Losses occurred in only 45 percent of the deals where investors did above-average due diligence.
Industry expertise – Analysis indicated that expertise has a material impact on angel investors’ returns. Returns were nearly double for investments in ventures where the investor had related industry expertise.
Participation – After an angel makes an investment, his or her participation in the venture – through mentoring, coaching, and financial monitoring – is significantly related to that venture’s returns, according to the study.
Follow-on investing – Deals where the angel investor made follow-on investments generated significantly lower returns. In ventures where follow-on investments were made, nearly 70 percent of the exits occurred at a loss. The study recommended additional research to determine the impact of other factors in these results.