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Many observers say that angels have high growth targets for the companies in which they invest. Some of them say that businesses need to project $50 million in sales in six years to be angel-appropriate, while others say that the target needs to be $100 million in that time period for the company to be right for angels.
At the same time, a number of estimates indicate that more than 50,000 companies receive an angel investment in the United States every year. And many experts say that ten percent of angel backed companies meet the investors’ sales growth expectations. Therefore, you might expect that around 5,000 angel backed companies hit angels’ growth targets every year.
However, it turns out that far fewer companies manage to do this than conventional wisdom suggests. To figure out how many companies hit these growth targets, I looked at the sales at age six of a cohort of companies started in a single year. Of the 511,000 new businesses in the cohort, U.S. Census data showed that 474 companies hit $50 million or more in sales by age six, while 175 companies hit $100 million in sales in that time period.
This pattern raises an interesting question: Do angels invest in companies with lower expected sales than they let on or do fewer angel-backed companies meet the growth targets that angels have for them than conventional wisdom says?
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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 nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company. I discuss the topic of this post in more detail in my book Fool’s Gold: The Truth Behind Angel Investing in America .
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Martin Lindeskog
Scott,
Have the angel investments increased during the last 10 years?
Scott, what about the idea that aiming only for big hits is a reasonable strategy in a hit-or-miss business? Doesn’t this become commonplace when the vast majority of attempts will miss? You want only the ones aiming at the moon, hoping that your batch of mostly losers will include one that actually hits the moon, and that one pays for the others.
What bothers me a bit about this is that it’s a better strategy for investors taking a lot of shots, and I think of angels, particularly after reading your book, as taking just a few. Seems like the lower risk with interesting payoff might be a better bet than aiming for the moon.
Interesting post! Thanks. Tim
Almost all of my successful angel investments never made it to 6 years. They were acquired earlier than that.
I’ve also successfully invested in companies with much, much lower sales expectations than $50 or $100 million in 6 years.
And I’ve lost money on companies that passed $50 million in sales in less than 6 years (bad memories from the dot com bust:)).
I’m looking for a high ROI, not just high sales growth.
Steve
Interesting data. After hearing from Steve, I realize that angels take bigger risks than I had expected. I guess nothing is ever foolproof.
I’d suspect that the answer is a bit of both (angels lowering expectations and companies under-performing).
Hmm. Great post to keep one thinking, Scott. In the investments I’ve made, I guess I’m not looking to hit the moon, but I have hopes (based on serious crunching) that I’ll get a healthier return than my stock portfolio.
@Steve, I’d be interested to know the total number of companies you’re referring to so we can data check them against Scott’s research.