(or What kind of returns can I get from Angel Investing? )
When we talk to people about the Seattle Angel Conference, there is often a question about the previous returns that we are seeing from our efforts with our previous Angel Conferences. This is actually a hard question to answer in a couple of ways.
The main hard part of the question, is that it makes assumptions about Angel investment that are not particularly helpful early on. There are features of Angel Investing that make it different than your regular old stock market investing that people who ask this question are trying to compare against.
Angel Investing:
- Takes a long time to see results
- Is not liquid, so you can't get in and out of it easily
- Has a weird return profile
- Depends a great deal on factors that are hard to measure
- Depends on factors that are hard to control
Rob Wiltbank and Wade Brooks at Willamette University have been studying Angel Investing and have collection some of the best data available. If you look at their data,
you can get a more comprehensive set of data about general angel investing.
Out of that we learn that exits tend to take some time. Sometimes a long time.
The typical expectation is that the Angel Investments make it to exit in 7-9 years. If you factor in that the ones that fail, tend to fail early, then the ones that win will tend to be later... even later than 7-9 years.
So given that the Seattle Angel Conference is 5 years old. We would expect a few failures and no wins.... And that is where we are at….
We have a list of companies and regularly track their progress. Over the last 10 cycles (5 years)
We have about 21 investments, depending where you draw the circle. We have depolyed about $2M. And we have educated more than 200 Angel Investors.
Out of those efforts, we see:
No positive exits.
2 deaths.
9 have follow on funding of some kind.
In general, we can conclude about Angel investing that:
Angel Investing is risky.
The investment is illiquid.
It will take a decade to win, if it wins.
Out of every 10, you will see 9 not give enough money back.
You need to be in 20 deals to have a good chance of winning.
This assumes you do good due diligence, remove the bad ones
and only start with very very very good companies at the beginning.
However, more importantly, the Seattle Angel Conference is not about returns. It is about learning. While it can be risky if done wrong, Angel Investing overall seems to produce some interesting returns , as we see in the Wiltbank data. What are the habits and behaviors that make it more likely that you will achieve those types of returns?
We believe that Angel Investing process can produce good returns if you engage it well. You can explore the Halo Report from the Angel Resource Institute and see that overall Angel annualized returns look like 25% / year. But these returns are not evenly distributed at all. More than 60% of the companies loose some or all of the money invested. Close to 30% provide some returns, but not a lot. So this is not a normally distributed return profile.
More importantly for the Angel Conference model, the process is a bit overly structured to make it possible to create more learning about the process of investing. So those companies that are exceptional, have previous experience, know the network of investors and have great momentum…. They are already connected to people and are quick to get funding. So the angel conference never will be about optimizing the returns. Instead, it is a very low cost, simple way to get a deep look into the process and to learn about the issues that make Angel Investing interesting. And to see first hand some of the issues that are hard to deal with and deserve significant consideration before proceeding on a deal.
For New investors, who have never been inside an Angel Investment, it is a great way to gain perspective about the market, the structure of companies, and to build relationships in the market. It is the expectation that alumni investors of the Seattle Angel Conference will learn a great deal about their investment thesis and where they want to engage. And then will move on to the other Angel groups that match their goals.
If an early focus on returns is the highest priority for the investor, then it is likely that the risk profile is one of low risk and this may not be appropriate to engage in the process of Angel Investing.
To repeat a bit:
Angel investing is risky - Learn where things work and where they don’t
If you have a low risk profile it will be frustrating.
Returns take a long time.
The return distribution is not normal. It is specifically highly skewed.
The conference is not built to provide excellent returns, it's built for education. If you learn (hence the conference) and build a portfolio, returns can be pretty good.
There are other Angel Organizations in Seattle that have a much stronger focus on building an opportunity for good returns:
Seattle Angel Fund - http://seattleangelfund.net
TAGS - http://tieangelsseattle.org/
PSVC - http://www.pugetsoundvc.com/
Element 8 - http://www.element8angels.com/
Wings - http://medtechwings.com/
Alliance of Angels - https://www.allianceofangels.com/
There is some data about how they are performing here: (2015)
Every April, the MIT Forum has been doing a “Meet the Angels” workshop, where folks talk about how Angel Investing works
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Rob Wiltbank - http://www.willamette.edu/~wiltbank/
Angel Investing Returns - http://www.willamette.edu/~wiltbank/angel_performance_report.html
Angel Investors do make money - https://techcrunch.com/2012/10/13/angel-investors-make-2-5x-returns-overall/
Angel Resource Institute - Halo Report - https://www.angelresourceinstitute.org/
