Angel groups outperform VCs Print E-mail

Angel groups outperform VCs

Posted by / John Cook's Venture Blog
November 12, 2007 10:26 a.m.

Maybe it is better to take money from angel investors, rather than deep-pocketed venture capitalists. Angel investment groups showed an average internal rate of return of 27 percent during a three-and-a-half-year period studied by researchers at the Willamette University and the University of Washington. The report, dubbed the largest study on financial returns for angel groups, was released today by the Ewing Marion Kauffman Foundation.

While the report did not compare angel results to venture capital funds, the research would indicate that angels are beating VCs. After all, the 3-year return for venture capital funds stood at 10.2 percent at the end of June, according to a report released last month by the National Venture Capital Association and Thomson Financial.

But angel investing is still risky business and -- like venture capital -- most angels make their money on a few high-performing deals. Fifty-two percent of all of the exits produced less money than what was invested, while 7 percent accounted for 75 percent of all returns.

And angel investors are still a good feeder system to venture capital firms, with 35 percent of companies taking on capital from VCs after an angel deal. But that doesn't necessarily boost the likelihood of success, though it does lead to bigger returns and failures in some cases. Robert Wiltbank of Willamette University and Warren Boeker of the UW write:

"Overall, the multiples for the ventures that took on formal venture capital were not significantly higher than for those that had no investment from venture capital firms. There was, however, a marked difference in the distribution of their returns. As shown in the chart below, those exits where VC investment occurred had a more extreme distribution, with more failures and larger exits than those where VCs were not involved. The latter tended to fail less but have more exits in the 1X to 5X category."

The authors' final thought is pretty obvious, but it is worth noting.

"While clearly not for the faint of heart, this research suggests that angel investing can be done well in the pursuit of legitimate financial returns."

UPDATE: I just heard from Robert Wiltbank of Willamette University who says that they didn't include comparisons to venture capital firms because they didn't want to "pick the fight." However, he said the conclusions drawn above are accurate.

"There's no question that the data I have, angel investors outperform the vast majority of venture capitalists," he said.

Wiltbank said they studied 86 angel groups, including Keiretsu Forum, Alliance of Angels and Seraph Capital in the Pacific Northwest.

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