For our academic article this week, we are revisiting that critical question: do angels make money?
There are several significant papers on this topic, so rather than review just one we’re going to have a quick recap of the available literate.
If you ever visit the VentureSouth blog, you might have read our Tracking Angel Returns post and follow-up series. If so, you will be familiar with the two seminal papers on the subject - Returns to Angel Investors in Groups by Robert Wiltbank and Warren Boeker from 2007 (SSRN link here) that was part of the Angel Investor Performance Project (link here), and their update Tracking Angel Returns from 2016 (link here).
The first surveyed angel investors and over 1,100 exits to find an average 2.6x return on investment in 3.5 years, or a 27% IRR. The second added another 250 investments, and found a similar result – 2.5x return over 4.5 years, or 22% IRR.
We noted some caveats on these results on a follow-up post – and of course the authors of the papers thought through those concerns in their analyses.
These findings are consistent with the expected returns (i.e. what angels THINK they are going to get from angel investing – which is not to say any angel investment “ought” to generate these kinds of returns). For example, Matthew Le Merle’s study, Capturing the Expected Returns of Angel Investors in Groups, which showed 55% of investors expect returns above 20% IRR. And Ramon DeGennaro and Gerald Dwyer’s analysis from 2010 (SSRN link here) that estimated angels expect a “net return in excess of the riskless rate [of] 69.9% percent per year” (p.19) – so around 70% annual return for a given deal.
There are many more papers out there, including several we have discussed in prior paper dives, that provide statistics on proportions of wins and losses in early stage investing, both angels and VCs. There are fewer, though, that translate these ratios into dollar returns: the papers cited above are, and remain, the best data available to evaluate this question (in our opinion, which is worth approximately what you’ve paid for it!).