One important statistic for entrepreneurs, angel investors, and policy makers to consider is the rate at which desirable exits – initial public offerings and mergers and acquisitions – occur among angel-backed companies.
In my book Fool’s Gold: The Truth Behind Angel Investing in America, I make some estimates of the rate at which angel-backed companies go public and get acquired, and find that these exits occur in about 1 to 1.5 percent of angel investments. This, of course, is far below the 15.5 percent of venture capital-backed companies that achieve one of these positive exits.
It’s not surprising that the rate of positive exit is so low among angels. After all, the typical angel (a person who invests his or her own money in a private company run by someone who is neither a friend nor a family member) is an unaccredited, individual investor who is not investing in high tech companies and is not getting a follow on investment from a VC.
Recently, a type of angel investor that is much more similar to a venture capitalist than the typical angel has emerged, the angel group investor. Members of angel groups are all accredited investors, have a much more sophisticated view of angel investing than the typical angel, and tend to focus on the technology businesses that VCs like.
So one would expect that angel groups would have a much higher exit rate than the typical angel. But, how much higher?
In the past, this number has been difficult to estimate. However, some data from the 2008 Angel Group Confidence Report put out by the Angel Capital Association allows for a crude estimate. The report explains that the average angel group made 6.12 deals in 2008. The report also shows the number of IPOs and acquisitions the groups has among their portfolio companies in 2008. If we assume that the 2.1 percent of angel groups that reported 5 or more exits in 2008, each had an average of 6 exits, then we can use the ACA’s numbers to calculate the average number of IPOs and acquisitions per angel group. Based on the data from the report, last year’s average was 0.36 exits per group, or 5.9 percent of the groups’ investments.
This is a crude estimate because many angel groups are young, and it takes a while for investments to reach an exit stage. So the number of exits per deal is probably lower than it will be when the groups reach maturity. But it is interesting to see that angel groups seem to have a successful exit percentage that is between that of individual angels and venture capitalists.
It’s also important to consider the implication of a successful exit percentage that is less than the rule of thumb of 10 percent that many angel groups assume they will have. If the rate stays around 6 percent angel groups will need to alter their expectations.
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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 recently listened to a talk by people from the Swedish Private Equity & Venture Capital Association. What would be the equivalent organization in America?
Your posts on the topic of Angel investing are always very educational to me, Scott, and the statistics you provide are always surprising to me. Thanks for another eye-opening look into the world of “Angels.” 🙂
David S. Rose
OK, for a change I actually agree with Scott on this one! [grin] But I would strongly reiterate two caveats he makes: first, that the analysis is very, very rough because there simply isn’t enough data yet, and second, that most angel groups are relatively young, and with a typical angel hold time longer than the time that many groups have existed, it’s probably too early to tell for sure.
(And Martin, to answer your question, the equivalent to the Swedish group would be the National Venture Capital Association.)
David: Thanks for the information. Are you a member of National Venture Capital Association? The representative for the Swedish group said that they probably would be fewer members this year due to the economy.
Scott did really show his expertise again in Angels, Staci!
Scott – thanks for writing about an important aspect of small business that always seems to overwhelm me. You make the information useful and accessible for everyone.
I most appreciate your explaining what’s BEHIND the statistics.
Interesting info. Although I don’t know much about angels, it’s interesting to read the stats and facts behind it.
I’d actually suggest that the exit rate is higher, from a practical standpoint. First of course is the sample size and “newness” of the sample. Second is the fact that if each angel exits 6% of their investments, isn’t that on an annual basis. So, if a group makes 6 investments, and over the next 3 years exits 6% each year of the initial years investments, the total exited investments is closer to 18%?
Very interesting. Thank you for the stats.
I’m an economics guy therefore I look for socio-economic incentives that create reality. I’m going to get this book you speak of, ‘Fool’s Gold’ to learn more.
Is it the structure of the financial instrument that is Angel Investing (compared to the structure of the financial instrument that is VC)?
Is it management / participation of the angel (vs. VC)
What are the factors?
Very very interesting