[Posted on November 12, 2007 - 6:18 PM]
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DiggOnly 35% of angel-backed companies received follow-on financing from venture capital firms. And those that did raise venture funding were more likely to go on to either wild success or an ignoble end, according to a newly issued study on angel investment returns.
The report, published Monday by The Ewing Marion Kauffman Foundation, looked at the returns generated by angels investing as part of an organized group. The report concluded that angel investment can generate returns that are on par with those of early-stage venture firms. According to the findings, angel groups see investment returns of 2.6 times the amount of money invested in 3.5 years, an internal rate of return of about 27%.
The Kauffman Foundation is a not-for-profit organization focused on entrepreneurial issues. The study surveyed 539 angels in 86 angel groups and tried to back up anecdotal evidence with hard data about angel returns. In general the angel investment community saw the numbers as a validation of their abilities and the importance of angels in today's capital markets.
Aside from returns, the report examined how taking venture capital investment affected a startup originally backed by angels. While the average returns for companies accepting venture capital were similar to those backed only by angels, the distribution of the returns clustered at the extremes. Exits "where VC investment occurred had a more extreme distribution, with more failures and larger exits than those where VCs were not involved," the report says. "The latter tended to fail less but have more exits in the 1x to 5x category."
That data supports the perception that venture firms tend to push startups to swing for the fences. Sometimes they hit home runs and sometimes they strike out, but they rarely hit bloop singles, just to complete the admittedly tortured metaphor.
For entrepreneurs, this data might help determine which type of capital to raise. Higher risk of failure as a venture-backed company might lead to higher rewards. - Stacey Higginbotham
See the Returns to Angel Investors in Groups report
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As the manager of one of the groups that participated in the study and as the Chairman of the Angel Capital Education Foundation when this study was started, I am pleased we were able to publish this report, which is the first of its kind. Entrepreneurs, angel investors and venture capitalists all should realize, however, that this is just the first study. The venture markets continue to evolve, and angel groups themselves are growing and professionalizing rapidly. Expect change and more research to understand it.