On a previous blog, DevonshireDozer asked for evidence for the “business axiom” often quoted by those promoting Business Angel activity. Namely that returns are 5:4:1 (5 companies fail, 4 repay the investment and 1 is a star returning ten times the investment). Here are the results from two recent reports on angel activity and the results from the UK & USA. Do they conclude with the same ratio? Answer: I don’t think so – better or worse? Read on to find out more…
There are two recent reports that give a window on the results of angel investing. Here is the raw data from the US and UK experience as reported by NESTA “Siding with the Angels” in May 2009  and the Kauffman Foundation “Returns to Angel Investors in Groups” in November 2007 .
Some interesting points:
- 8 years for 10x return. “Exits where returns exceeded ten times the investment took approximately eight years.” [UK]
- Average pot is £1M. “158 angel investors cumulatively invested £134 million.” [UK]
- “9% of the exits produced 80% of the cash returned.” [UK]
- “10% of the exits produced 90% of the cash returned.” [USA]
So let’s get to the actual results of these reports into Business Angel exits. The actual return results in the table below are biased in at least two ways:
- Self-selection. “Only people who have positive experiences tend to share their numbers.” The USA study attempted to control for this bias and concludes that the bias is not significant.
- Survivor. “Data only from people who continue to participate in angel investor groups [was collected] thus potentially missing data from angels who failed and left the groups.”
While the reports are not directly comparable, there should be some consistency since Robert Wiltbank was the author of both reports (join in the case of the USA study).
|UK (ex Scotland)||USA|
|Date of publication||May 2009 ||November 2007 |
|Definition of a Business Angel||“An individual acting alone or in a formal or informal syndicate who invests their own money directly in an unquoted business in which there is no family connection.”||“Net worth of at least £1 million, and annual salary of $200,000 for the last three years or $300,000 between angel and their spouse.”|
|1x – 5x return||34%||35%|
|5x – 10x return||4%||6%|
|10x – 30x return||5%||3%|
|> 30x return||1%||4%|
|Overall multiple||2.2x (22% IRR)||2.6x (27% IRR)|
|# years held||3.6||3.5|
|Number of exits||406|
|Number of angels||158||539|
This suggests that the Failure:Return:Success ratio is 56:[34+5]:[5+1] or approximately 9:6:1 in the UK which is similar to the often quoted 5:4:1 ratio (and was the ratio I used in my recent portfolio analysis).
The USA ratio is approximately 7:6:1 which is better than the UK. This raises an interesting question: why do Business Angles in the USA do better than their UK counterparts? Or is this difference a result of Self-Selection and/or Survivor bias?
In the next in this series, we will look at how we can control for the survivors and what this does to the figures before the final blog of the series where we can revisit the portfolio analysis in light of this new information. p14, “Siding with the Angels: Business angel investing – promising outcomes and effective strategies”, May 2009, Wiltbank.  p3, “Returns to Angel Investors in Groups”, November 2007, Wiltbank & Boeker.