“How much?” “Why are Business Angels so greedy? I’m doing all the work!” I’ve heard it so many times!
Investors are looking for business that will return their money, keep pace with other investments such as the stock market and property and pay a premium for the risk and the time they spend on it. It is a high risk investment class which is fun, exciting and takes a lot of management time.
We’re going to make some big assumptions to keep this to a minute… our first is that the risk premium is just 8%.
Starting with the assumption that an investor has $1 million, spends half his time working with his ten investee companies and expects to exit in three years we can work it out the target return.
Each company receives of $100K in cash and 10 days per year every year. Assuming the investor values his time at $100 thousand per annum, that’s $50K per year. With the 8% interest to cover risk, the investor would need to see $1.4 million in three years.
Historically, we know that five out of ten will be a complete loss, four will return their money and the one will be the star.
That means the star must grow to $1 million.
That’s a 10x return in three years.
Just to get their money back.
And they’ve made NO return on the investment.
Does 10x return seem so unreasonable now?