The latest report on Angel Activity in the UK is a massive 102 pages in length. It's a good read and it's "crunchy". That is, comments are backed up by real deal data, a survey of angels and scaling up from known investments to estimate the market size in the UK. This week I present a quick synopsis of the report. Lots of facts, question is, what to make of them? This is your chance to make a comment before I write another blog.
Scottish medical technology company Mpathy Medical has been sold to a Danish firm in a £22m deal. “Archangel investors, who put in almost £5.6m to Mpathy and its sister company Gyneideas – which was sold as part of the deal – should receive about £11.8m from the sale.” That’s a 2x return. Sounds like a good return on investment? But is it?
David Grahame, director at Linc Scotland, the national association for business angels, said it was an “important milestone” for angel investment when he spoke to BBC Scotland. He said “It reinforces Scotland’s reputation for entrepreneurship and innovation and is a real success story for the Scottish Co-investment Fund.” All excellent news then. Scotland is on the map and proves that angel investment makes sense.
We need to make some assumptions to be able to work out what sort of rate of return the investors will see. So making the following assumptions:
- We know that the company started in 2003. Let’s assume the full £5.6M was invested in 2004 although it was almost certainly done in many tranches over the years.
- Let’s use the average earnings as our index for time value of money. £1 in 2004 was worth £1.17 in 2008 (the year that last figures are available). So we’ll use a fact of 1.21 for the last two years to bring us to 2010. (See for the earnings calculator).
Now the calculations:
The investment of £5.6M cash would have been worth £5.6M * 1.21 = £6.8M in 2010.
To calculate the rate of return we need to know what effective rate would take us from £6.7M to £11.8M in 7 years. To find this out we need to solve the equation:
6.8 * (1 + x) ^ 6 = 11.8
Taps on calculator…
X = 0.096
Therefore (given our assumptions) the Return on the Investment is 9.6%.
Does this results demonstrate “Scotland’s reputation for entrepreneurship and innovation”. Would you put your money into a high risk company for this return? Does this return cover all the failures that you might have invested in?