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.