What kind of financial return can I expect from angel investing?

Now we know. The “Returns to Angel Investors in Groups” study has been released.

“While clearly not for the faint of heart, this research suggests that angel investing can be done well in the pursuit of legitimate financial returns.”

Average return: 2.6X

Average IRR: 27%

Average investment timeframe: 3.5 years.

The largest study on “angel” exits has been released by the Kauffman Foundation and the Angel Capital Education Foundation. (Full disclosure–I am on the BOD of the Angel Capital Association.)

Factors that influence positve returns for angel investing:

1.) Due Diligence Time

In the heyday, (1999-ish) it was common to write a $25,000 or $50,000 check with no due diligence and wish for the best. No more. Now the median is 20 hours and the average is 40 hours of due diligence.  Much to the frustration of some entrepreneurs, our due diligence process has gotten longer in the last 3-4 years…now we know why! So, the next time you ask an angel investor, “So, how long until I get the money?”–now you know. The hot money is gone.

2.) Sector/Industry Experience

Our group looks exclusively at technology related deals. We’ve said for years to “invest in what you know and like”. We’ve been mightily criticized for years for being ‘too narrow”. Well, it looks as if our instincts were right. This study says that “expertise had a material impact on angel investors’ earned returns”. Our first exit of 2007 was a software deal that had a ex-Microsoftie (software), a tech CFO (financial expertise) and a serial entrepreneur (operations expertise). All were very involved in the company and it exited in 11 months….

3.) Mentoring/Participation

 This is probably the most underutilised value in an organized angel group. Most entrepreneurs just want “the money” and often reject any mentoring. However, we have found that the best performing companies actively solicit mentoring and help from their early investors.

Interesting facts from the study:

• 99% of angels are college educated
• 50% have graduate degrees
• 22% have never worked in a large organization
• 93% of angel investments are in seed or early stage deals–not “late” stage deals as has been reported lately
• Length of time angel investing per individual: 9 years
• 35% of angel deals took on venture capital
• 65% of angel deals did not take on venture capital

More to come!