Many observers say that a big trend in financing new companies comes from accredited investors who invest as part of angel groups. However, if we take a look at the information on the angel investment activity of angel groups that are members of the Angel Capital Association (ACA) – the organizing body that many angel groups belong to – the numbers belie that argument.
The ACA is made up of 133 U.S. angel groups, or about half of the groups that exist in the United States. In 2008, these groups invested in an average of 4.5 new companies each, or a total of 599 new companies. If we assume that the groups that are not members of the ACA invested at the same rate as those that were members – a generous assumption since the biggest angel groups tend to be members – then we are left with angel groups investing in about 1200 new companies every year.
Approximately 600,000 new employer businesses are created in the United States every year, which means that no more than 0.2 percent of new employer businesses founded every year are financed by angel groups.
The ACA reports that about 8 percent of the companies in which angel group members invest generate a return of 10 times the investors’ money or more, the success benchmark often discussed by sophisticated investors. Putting these numbers together, we find that angel groups invest in about 96 companies per year that generate this desired return.
That means that less than 2 in 1000 new employer businesses founded every year will both get an angel group investment and generate a 10X or more return for those investors.
I draw three conclusions from these numbers. First, for angel group members, finding successful new businesses to fund is really a search for a needle in a haystack. Second, angel groups are not a very important source of financing for most start-up companies. Third, the importance of angel groups to the economy lies in the quality of the companies that they back, not the quantity.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures