Angel investor returns

Recently  (Sep 28,2010) I went to a presentation in Bellingham by Rob Wiltbank of Willamette University in Oregon. Wiltbank does research on angel investing and the returns enjoyed by angels. He looked at 1000 “exits” in North America – i.e. companies that gave a payback to their investors (however large or small, including zero return for failed deals).

Of 1,000 companies studied:

52% returned less than the original investment in 3 years
33% returned 1 to 5 times the original investment in 3.3 years
8% returned 5 to 10 times the original investment in 4.6 years
3% returned 10 to 30 times the original investment in 4.9 years
4% returned more than 30 times the original investment in over 6 years

The overall average works out to a 2.6 times return in 3.5 years which works out to an IRR of 27% – not too shabby!

At first, one might conclude that the investment hold periods are relatively short, i.e. 3.5 years on average, but I think that’s skewed because the first group (that’s the 52% that produced a negative return) includes the failures and they usually happen early in the game.

The stat that more than half fail within 3 years makes me feel good about our WUTIF Angel Fund because of the 50 companies that we’ve invested in, less than 10% have failed since we made our first investments over 6 years ago in late 2004. We’ve only had one exit so far and that was Brightside Technologies which was sold to Dolby Labs in 2007 to give us a 2.1 times return in just under 2 years.

What makes a winner? Wiltbank struck a chord with me when he talked about prediction versus control. Successful entrepreneurs are less inclined to make big predictions of outcomes and then determine the inputs to achieve those outcomes than they are to determine what it is they can control to achieve desirable outcomes. For example, Joe Entrepreneur will be thinking about what he can do and then simply go about it. What can he put together and who can he sell it to? Wiltbank noted that good entrepreneurs really know how to sell. After all, what’s more important than a customer? What’s important to me in looking at a deal is who the customers are, or at least, who will they be and how can Joe sign them up.

Valuations are always a hot topic. Wiltbank had a very simple formula for this: you take the amount of capital being raised on the seed (angel) round and divide it by 0.3. For example, a company raising $500K (which is typical for a seed round), would be valued at $1.66 million after the investment has been made. In other words, the angels get about 30% of the deal. This is very close to what I’ve seen here in the Vancouver market this past year.

From a quick survey of 13 Angel groups in the USA and Canada done last week by Bill Payne, the average pre-investment valuation was $1.67 million. That suggests that, using Wiltbanks’ rule of thumb, the average raise was in the $700K range. Of course, these are ballpark numbers in any event and are influenced by the stage of a company’s development, the strength of its IP (Intellectual Property), the management team (and it’s negotiating ability!) AND the amount being raised. Raise more, and you’re worth more!

For entrepreneurs and angels, there are two venues in British Columbia for deal flow. These are the regular monthly VANTEC meetings and the semi-annual all-day ANGEL FORUM. The 28th Angel Forum will take place on October 19th. There’s still time to sign up!

And, next week, I’ll be heading off to Canada’s National Angel Organization annual summit in Montreal. At last year’s summit, the NAO gave me the award of “Angel Investor of the Year” and I was further humbled by also getting the “BC Angel Investor of 2009” award at the Angel Forum. While I know many angels who quietly invest much larger sums than I’m capable of, and who deserve that honour more than I do, I think it’s because of my work with VANTEC and angel funds that gives me a more visible profile. And, in that regard, I really want to encourage you to look at angel investing especially in light of Wiltbank’s reported 27% IRR!

What? “I’m not an angel”, you say. Alas, not many people – in fact, fewer than 2% of the population – can claim to be angels under the so-called “accredited investor” definition as determined by Canada’s securities regulators. The terms “angel” and “accredited” are generally interchangeable. In fact, in the USA, the Angel Capital Association only recognizes its angel organizations if all of their angel members meet the accreditation standards. The USA and Canadian definitions are quite similar. In Canada, to be accredited you must have a net worth (excluding your home) of either $1 million or personal annual income of $200K or family income of at least $300K. Do you qualify?

If only 2% of the population are millionaires, how many angels are there? My guess it that, at best, it’s 10% of that number based on the Tech Sector/GDP ratio. And, how many of that number consider themselves angels? Optimisticly, that’s less than half.  So, in Canada, that works out to 1/2 of 2% of 10% of 35 million = 35,000 (or 0.1% of the population).

One of the big challenges we have in growing our technology sector is capital formation. How do we mobilize capital for start-ups? Beyond friends and families, angel investors are really the only option for entrepreneurs. Institutional Venture Capital (which, in itself, is struggling to make good returns) rarely invests in small seed rounds. The problem with Angels, though, is simply that there aren’t enough of them. This, I believe, is a big impediment to innovation.

There’s also a growing group of so-called super angels that are starting to act like VCs and may displace them over time. Unlike VCs who invest other people’s money, these folks invest their own capital. That’s why they’re still called angels. But, like VCs, they tend to look at bigger deals later on.

So, why can’t poor you, a member of the 98% non-angel group, invest in a startup? It’s because the regulators want to protect you from throwing away your money on a flaky deal. So, for a company to legally be able to sell you its shares, you must either be accredited (i.e. you can afford to be stupid) or be a close friend or relative (i.e. its OK for friends to be fooled). Companies that want to sell their shares to anyone need to file a full-blown “prospectus” with the regulators (which also means they become public companies). Although a few companies do this, it simply doesn’t make any sense for a start-up needing a few hundred thousand dollars. While there are other “exemptions” to the prospectus requirement, such as investing a minimum of $150,000 (in B.C. the minimum used to be $25,000 – whatever happened to that?) or having the company do a watered-down prospectus called an “Offering Memorandum” (still costly and time-consuming), we still need a better exemption. For example, why not simply have investors sign an affidavit or questionnaire that they understand the risk? For the time being, it’s a roadblock.

We need to create more mechanisms to allow you, the wanna-be angel, to participate. One such mechanism that I’m involved in is GreenAngel Energy Corp (TSXV:GAE).  The idea was to create, using a prospectus, an investment company that anyone can buy into.  In the case of GreenAngel, real angels can buy in directly by purchasing treasury shares from the company. Non-angels can trade on the TSX venture stock exchange and easily get quotes and news from numerous sources.

In the same way that small investors created a buoyant market for the mining sector, they could create  the same environment for tech stocks – especially the small, unproven ones.  But, instead of emerging companies going public too early, an investment company such as GreenAngel can take equity positions in a number of companies thereby improving the odds of a good overall return – hopefully as good as Wiltbank’s 27%.

By focusing on a hot new sector, i.e. “green energy”, the company will be able to attract not just investors who want to get in on the ground floor with emerging companies, but also those who are keen on green.

Another benefit in using a public investment company is that investors have on-going liquidity. They don’t need to wait for a buy-out or IPO. This is one of the most often heard angel pet peeves – getting into a deal and not being able to get out. One of the biggest challenges for GreenAngel will be to build awareness and increase the investor base – and daily trading – to provide such liquidity.

If we can make this work for greentech, then why not then do it for Web2.0, genomics, or new media technologies?

Bottom line – we need more angels – big ones and little ones! And you can be one too!

Additional Notes:

The Small Business Administration estimates (click on this link for an article on the importance of angel investing) that there are about 500,000 angel investors in the United States, and that they invest about $20 billion per year. That’s about 0.15% of the US population. My guesstimate above suggested that Canada would have 35,000 angels (0.1% of the Canadian population) – that jives with the US estimate.

[Click Here] for a BusinessWeek article and interview on Super Angels.

[Click Here] for an Aug 2010 article in the Wall Street Journal on Super Angels.

[Click Here] for a Nov 24, 2010 article in the Globe & Mail on Super Angels.

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3 Responses to “Angel investor returns”

  1. George Wolff says:

    Very good blog, MIke Some very interesting thoughts from the conference in Bellingham.

  2. Ron Thompson says:


    Great insights on Angel investing.

    Out of curiosity, having seen the results of Angel studies before with the impressive 27% average return, I wonder if this is based on information from all Angel investing acivities ? Or, calculated from only those that reported ? If you have any additional information to clarify this, please advise since I have observed many Angels are struggling to realize a positive return on their investment portfolio !

    In a separated but related matter, to improve the probability of venture success, it appears those Angels who add value are better positioned to manage risk and realize greater rewards. Any inisghts on this ?


    Ron Thompson

    • admin says:

      I believe that the survey was based on 1,000 companies that experienced an exit – good or bad. My guess is that if you ask ALL of the angels involved in the 1,000 companies, they would be involved in several thousand additional companies that have yet to experience an exit.