Entrepreneurship and Innovation Today

Report> Returns to Angel Investors

Last week the  Ewing Marion Kauffman Foundation and the Angel Capital Foundation released the results of a study  on the financial returns of angel investors in North America....well mostly USA in fact.

The study showed that angels affiliated with organized angel groups achieved an average of 27% internal rate of return on their investments.  Overall, these groups experienced exits that generated 2.6 times their invested capital in 3.5 years from investment to exit.

Even though the press release puts a positive spin on things, saying: "This return compares favorably to that of other private equity investments, including those of early-stage venture capital.”  IMHO, this is a mediocre ROI and below what Angels and VC's expect to get- a 10x return on investment that covers most of their other losses.

Sixty-one percent of angels in the study had portfolio returns that were greater than the capital they invested. So that means that thirty nine percent lost money (took less money out on exit then they put in)

Interestingly, the study found that “ … in ventures where follow-on investments were made, nearly 70 percent of the exits occurred at a loss.”

This confirms the rule of thumb that that VC's & Angels use .....Out of 10  investments that VC's make,  1-2 might be outright winners, 4 are loosers and 4 are dead-in the-water. So for a VC to make up for the 9/10 losses, they are looking to getting a 10X ROI or 10 million out of every million invested from the one or two winners, out of every ten deals made.

see Press Release

Download study here

Related materials:

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Angel Investor Bob Geras seeks to inspire youth

The Chicago Sun Times writes:

"Serial angel investor and newly minted septuagenarian Bob Geras is giving junior entrepreneurs 70,000 reasons to tighten up their business plans.

Geras, who has invested in hundreds of startups over the past 40 years, will provide $70,000 in grant money to the winners of the 2008 Illinois Business Schools' Plan Competition.  The competition will be held in March in conjunction with the 2008 Midwest Venture Summit.

Organized by Dennis Serio of the Illinois Business and Investors Forum, the competition debuted last year and featured presentations from students representing the University of Illinois at Chicago, DePaul University, the University of Chicago, the University of Illinois at Champaign/Urbana and the Illinois Institute of Technology.

"A community is only as strong as its youth," said Serio, 61, who started the Forum in 2004.  "We need to get back to taking care of our own so we can build the Motorolas and Caterpillars of the future.  The key is to rally support from an investment community that has not been active."

Geras added that his commitment as well as efforts by venture capitalist J.B. Pritzker and the Chicagoland Entrepreneurial Center are meant to break the "vicious circle" that sees Chicago "lose good companies and leading edge technologies to areas which are less risk averse."

How to convince an investor to back your startup? What's missing in your pitch?

At some point, most entrepreneurs will need to go out and look for money for their business startup. Look at any pop management or business magazine or newspaper column on small business or entrepreneurship. Sooner or later you are bound to run across an article on how to craft a winning proposal to bankers, angels or VC’s. You’ve seen those headlines…10 steps to a dynamite business plan.

The problem with most of these stories, is that they are nothing more then stories.

Compare any 5 random articles, and you’ll notice no common rhyme or reason. They are all over the map. Each will have a different set of priorities and a different focus, based most often on the whim of the writer, consultant or journalist. What likely happened is that the story started out with 12-15 priorities and the editor told the writer that they only had room for 10. You have to wonder what got cut and why?

Rarely will these articles refer to any credible academic research  ie what are investors ie bankers, VC’s and angels really looking for, when they are deciding to invest their money in your company?

The following quote offers a hint on what to stress the most.

The Venture Capitalist’s Maxim

I’d rather have a Class A entrepreneur with a Class B idea

Than  a Class A idea with  a Class B entrepreneur

While most entrepreneurs will intuitively rank and stress the business plan as the  most important thing that professional investors are looking for, most VC and Angels rate it as number 6, way down the list

I’ve seen too many business proposals that largely ignore the profiles of the management team or hide it at the end of a report in the appendix, instead of trumpeting it front and center. One piece of yet unpublished academic research cites up to 30 points that a savyy VC or Angel will look for in a management team. Many of these points are often forgotten or ignored by the novice entrepreneur in their pitch to angels and VC's.

Source: Certificate program in Entrepreneurship & Innovation; University of Toronto, School of Continuing Studies, St George Campus.

© 2005-2007 

Walter Derzko -"Changing the world, one idea at a time"©

Walter Derzko teaches at the Certificate Program on Entrepreneurship and Innovation at the University of Toronto, School of Continuing Studies, which starts in the Fall of 2007

Expert, Consultant and Keynote Speaker on Emerging Smart Technologies, Innovation, Entrepreneurship, Strategic Foresight, Business Development, Lateral Creative Thinking and author of an upcoming book on the Smart Economy "

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