Are you an Angel Investor or high net worth (HNW) individual seriously considering angel investing as a way to outperform the markets and to navigate your way through this economic crisis and uncertain time with capital to burn? If so, this article is essential reading.
The general financials sector has slumped by 46% and the FTSE 100 index has declined by over 30% year-to-date (at time of writing) which has caused a large amount of investors to diversify their portfolios away from traditional investments as a hedge against stock market volatility.
Some investors are now seriously considering Angel Investment as a serious alternative to traditional investments. The Great British Pound (at time of writing) has been getting weaker day by day, and foreign nationals are now looking at the UK as a serious place to invest their money into seed and early-stage investments as a result of all of the press around huge buy-outs and pay days for early investors in start-ups. None better known than Google, which saw one angel investor make over $1 billion (£650 million) from an initial investment of just $100,000 (£65,000)!
The list continues with such success stories as uSwitch, a website which helps consumers compare and change suppliers of various services, that was sold for around £210 million! This company was launched like many of the others with a handful of early-stage investors and a reasonable amount of money to get started.
Though these are not your run of the mill angel investments, the average investor return has been an impressive 2.6 times the initial investment according to a study conducted by the Ewing Marion Kauffman Foundation. That is an average internal rate of return (IRR) of 27%! Similar to the average IRRs seen by VCs!
Not surprisingly, most experienced angel investors are now expecting no less than 31-40% annual returns on their early stage and start up investments. This is the ideal range Angel Investors are aiming for and entrepreneurs that are serious about raising angel investment must understand that offering anything less then these ROIs in your Angel investment proposal might deter prospective investors. Entrepreneurs offering ROIs must also appreciate that placing anything more than 40% may not be realistic and may send the wrong message. The link above discusses valuation techniques on ROI.
In detail these findings found that angel investing had:
- Exits that generated 2.6 times their invested capital in 3.5 years, which is in line with other types of private equity deals.
- Seven percent of exits generated returns above 10 times their initial investment.
Venture Giants’ Note to Entrepreneurs: What would be your answer if an Angel Investor asked you how he/she could exit from your business angel investment in the future? Perhaps a Shareholder buy back when you have built a successful business? Or building a successful business that you can take to an initial public stock offering (IPO)? Or perhaps you intend for your angel investor to exit when your company is successfully built up and sold in three to five years? Knowing this will greatly assist you in raising the angel investment you need to get your company off the ground.
The study also assessed how the following strategic factors impacted the Angel Investors’ outcomes:
Angel Investors experienced better returns when they exercised more due diligence. This is an important check list that every Angel Investor should go through before deciding to carry out any type of Business angel investment. If you are an entrepreneur reading this article, we at Venture Giants would suggest that you acquaint yourself fully with these type of hard hitting questions that you might expect from prospective Business Angel Investors interested in investing in you. Remember, you only get one chance to woo a business angel investor – SO make it a good one!
Returns were nearly double for investments in ventures where the angel investor had related industry expertise.
It’s important to consider the fact that most angel investors prefer to invest in industries that they have considerable knowledge and experience in. Angel investors who interacted with their invested companies at least a couple of times a month experienced greater results.
After an angel makes an investment, his or her participation in the venture is significantly related to that venture’s returns.
In ventures where follow-on investments were made, 70 percent of the exits occurred at a loss.