August 21, 2014

Where Are All The Angel Group Investments?

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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

8 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

8 Reactions

  1. But what’re the stats on the devil groups?! :)

  2. Mark (Andertoons) We’re expecting a cartoon out of that! :)

  3. Hi Scott, This is very very intriguing data.

    In your article, you seem careful to limit your comments just to organized Angel groups.

    While I understand there is a trend in the past several years toward angels organizing into groups, you’re saying those organized angel groups are still limited in their impact.

    How does the organized angel group activity compare with individual angels that entrepreneurs find from among their local contacts, friends, colleagues, etc.? Are organized groups just the tip of the iceberg? Or is the impact of individual angel investors overstated?

    Anita

  4. Anita,

    Individual angels are more numerous than angel group members. But the data on individual angels suggests that the vast majority of them (3/4) are not accredited investors and do not invest in particularly high growth start-ups. So angel groups are the type of investors – make relatively large equity investments in high growth startups – that many people think about when then describe angels. So I wrote about them.

    The total angel story is more complicated than can be put in a single blog. It’s the topic of my next book – Fool’s Gold? The Truth About Angel Investing in America – due out in October. So I have more information about individual angels that I will also blog about in due course.

  5. INteresting reading. As a Uk based investor I tend to steer clear of formal groups. That said I will be refferring to this article in an up and coming article.

  6. Interesting statistics. They must really do a lot of research and pick only the best of the bunch. It would be interesting to see a list of bigger companies that started with the help of Angel groups.

  7. I’m a first time individual angel investor in WhyPark. May I ask what is the median individual and group angel investments? Don’t you think the individual angel flies under the investment community’s radar?

  8. Scott,

    As you know, I’ve really appreciated your efforts to get to the “real” numbers in this industry. According to our data, you’re not selling groups short on the number of deals that actually get done. We get about 28,000 entrepreneur submissions a year running through the groups that use Angelsoft. Of those, about 1.5% or a little over 400 get invested in..

    Obviously we don’t have the entire market using the software and a number of deals get done outside the system, but I think it shows your numbers are generally on the right track.

    One thing I would suggest is not to discount the role of “unaffiliated” angels. Though the vast majority of them are unaccredited and investing in smaller companies, our research suggests the REALLY big players often also fall into this category. We’ve begun to get these “lone wolf” angels using the software, so we should be able to get some real metrics on this in the upcoming year.

    Ryan Janssen
    Chief Operating Officer
    Angelsoft, LLC

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