The University of New Hampshire’s Center for Venture Research recently conducted
a study on angel investors who financed several software and early-stage high-tech
companies in the New England area. Of the companies that were surveyed, it was reported
that angel investors were seeking an average of a seven-in-seven return; that is,
they required seven times their invested capital over an expected holding period
of seven years. This renders an average expected return of 32%.
Not only did this approach demonstrate the tremendous amount of patience on the
angel investors’ behalf (willingness to remain in a deal for seven years), but it
also showed their rather modest ROI prospective (since many early/seed-stage investors
actually earned on average a compound ROI of 65.5% over the last five years). When
an entrepreneur puts into perspective the projected value of their company in five
to seven years, the amount of equity that angel investors receive, and their return
outcome, they must establish to angel investors that their company’s ROI is at least
Angels will simply not take the risk of financing a company if there is no indication
of profitability and a strong opportunity for company growth. However, many angel
investors are risky and will receive on average a strong multiple return on only
3/10 business ventures. All angel expectations vary for each individual, but they
always share two very important numbers when investing: their desired ROI and the
expected ROI. The following table gives an idea of the kinds of returns that professional
investors are looking for at various stages of company development:
Internal rate of return(%)
Return on investment
*Table 1: Rates of Return for Private Equity Investments.
* Susan L. Preston’s Angel Financing for Entrepreneurs: Early Stage Funding for
Long-Term Success, John Wiley & Sons Inc., 2007.
In November 2007, Robert Wiltbank of Willamette University and Warren Boeker of
the University of Washington conducted the largest study on financial returns of
North American angel investors. As reported by the Ewing Marion Kauffman Foundation
and the Angel capital Education Foundation, a total of 86 organized angel investor
groups, including 538 individual angel group investors who experienced more than
1,130 exits participated in the study. Demographics of each individual angel investor
and strategic factors, such as due diligence, industry experience, active participation
in their company investment, and follow-on investing were studied. It was discovered
that in more than half of the venture investments, some or all of the study participants’
investment capital was lost. Those organized angel groups who were more successful
received an average of 27% on their internal rate of return, and in 3.5 years, produced
2.6 their invested capital.
Some factors which have contributed to the financial success of angel investors
- Timely due diligence- When angels practiced more due diligence, they received
more profitable returns
- Industry expertise- Angel investors with more industry experience nearly
doubled their returns.
- Active participation- Through active venture involvement, including entrepreneur
mentoring, coaching and financial monitoring, angel companies received more returns.
- Follow-on investing- More lucrative returns resulted when angels avoided