“I began studying angel investing returns about 10 years ago as a result of a problem I couldn’t resolve: The investing world seemed certain that angel investors were rubes. Conventional wisdom dictated that they made reckless investments in very early-stage ventures mostly doomed to fail. And whenever they might come close to succeeding, savvy “professional” investors would just swoop in, cram them down, and win the real returns. In addition, angels were up against a selection problem: All the best entrepreneurs and opportunities would naturally gravitate to the best venture capital funds, leaving only the “scraps” for angel investors.
So which is it? Are angel investors just unwitting philanthropists or legitimate entrepreneurial investors?
Through research backed by the Kauffman Foundation, NESTA (a UK-based entrepreneurship foundation), the University of Washington, and Willamette University, I’ve compiled the largest data set on angel investor financial returns that exists. The angel investors I was spending time with didn’t seem so naïve or incompetent. While not professional investors, most angels are very successful in their own right, overwhelmingly as a result of their own entrepreneurial endeavors. Their firsthand knowledge of creating new businesses and new markets seemed quite relevant to successfully investing in other entrepreneurs working to do the same.
The best estimate of overall angel investor returns from this data is 2.5 times their investment, though in any one investment the odds of a positive return are less than 50 percent. This is absolutely competitive with venture capital returns.”