Tracking Angel Returns - the data

I had the pleasure of writing Matt’s regular Upstate Business Journal article this month. You can see the glossy original here. We’ve reproduced it below and included links so that interested readers can follow the source data. We’ll also have some follow up posts on this blog over the next couple of weeks to dive more deeply into areas that we didn’t have the word count to cover.

What about inflation? What about fees? S&P 500 is the wrong benchmark – and what about other alternative asset classes? You can’t beat the market!? We would love to hear your thoughts on this data - and objections to our interpretations of it.


How much money do angel investors make investing in early stage companies? Is it a genuine “asset class” with generally predictable returns or just a potentially expensive hobby?

When UCAN investors in Greenville and SCAN investors across South Carolina invest in a startup company, we have a specific return goal: to make a 50% or better annualized rate of return (or IRR), which translates to ten times our investment in five years (or four times in three years, etc.). We know that early stage investing is highly risky: startup often fail and take their investors’ capital with them. Factoring in the inevitable losses, we target a “portfolio return” of 20% IRR.

This compares to the annualized return (including dividends) of the S&P 500 over the last 15 years of around 7%. Do angels really enjoy rates of return three times better than public markets?

When you read about the fortunes of early private investors in Twitter or Uber, or founders like Mark Zuckerberg and Elon Musk, you see that sometimes they do. But those cases are news precisely because they are atypical. So what does returns do “regular” angel investors expect, and what do they actually achieve?

Matthew Le Merle’s study, Capturing the Expected Returns of Angel Investors in Groups, released last December, answers the first question. From surveys of angel groups, Le Merle found that 55% of investors expect returns above 20% IRR, and the rest expect 10-20% IRR – better than public markets on average. This resonates with surveys of our members that show they are targeting returns of 20%+ IRR.

Do angels achieve those goals? There is almost no public data on angel investment returns, as angels are private individuals with no reason to share their successes or failures, and gathering data from the 70,000 angel investments made each year would be a Herculean task. However, there are some clues. The most comprehensive data available on angel returns suggests that – in groups and on average across a diversified portfolio – angels have achieved rates of return over 20% IRR. The seminal study, Returns to Angel Investors in Groups, published in 2007 by Professors Robert Wiltbank and Warren Boeker, surveyed angel investors and over 1,000 exits, finding an average 2.6x return in 3.5 years, or 27% IRR. Other studies demonstrate similar results.

Why is this relevant now? Last week, Professor Wiltbank published an updated study, Tracking Angel Returns, to the Angel Capital Association, on whose board our partner Matt Dunbar serves. The study added another 250 investments, and found a similar result – 2.5x return over 4.5 years, or 22% IRR. If you’re a skeptic, you might consider that evidence of a decline in angel investment returns. One blog reacted with concern about “the internal rate of return dropping five points, down from 27 percent in 2007 to 22 percent in 2016.” That seems a bit of a leap, given the smaller sample size, changes in methodology, and other differences between the two studies.

Still, there is evidence that angel investments themselves have changed over the last decade – generally, and on the west coast particularly, moving to larger sizes, later stages, and higher valuations – so a slightly lower return is not surprising. But even the “lower” 22% IRR is three times the 7% of the S&P 500, so no-one in the angel investment world is panicking!

Wiltbank’s data reinforced other lessons for early stage investors. First, individual investments are very risky. Nearly 70% of investments in the new study returned less than the invested capital: picking one or two angel investments is not likely a winning strategy. Attractive returns come from portfolios of diverse investments – a basic expectation from portfolio theory. If you plan to be an angel investor, you should either dedicate the time, diligence, and resources to invest in 10 or more companies, or find a vehicle that does it for you – like the Palmetto Angel “sidecar fund” that is VentureSouth’s “index fund” of angel investments.

Secondly, patience is key. People lose money by trading on emotion – buying or selling based on fear or gut reactions. If you “lock in” losses by selling, you cannot achieve those target portfolio returns. Angel investments are typically protected from that downside because they are illiquid – the shares cannot be sold easily unless the company is sold, so losses are not locked in when the company faces challenges. On the other hand, angel capital is locked away for several years – five years is our guidance, although we aim for, and have realized, several earlier exits; but if you expect capital back in a year, you will be disappointed.

So how much money do angels make investing in early stage companies? With diligence, diversification and patience, 20% annual returns are still attainable. Although the UCAN and SCAN portfolios are still relatively young, we have already generated several returns above 50% IRR – and we anticipate our portfolio will compare favorably to the angel studies over time. And finally remember angel investors join our groups to “make money, have fun and do good”. Make money from diverse investments; have fun interacting with other members and innovative and exciting ideas; and do good advising our entrepreneurs and growing our local community’s economy. The total return on that is measured in more than just dollars.