U.S. angels see heavenly returns

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New York -- Angel investors operating in organized groups are seeing average returns on investment similar to those enjoyed by venture capitalists, according to a new study.

Angel financing has long been a first-stop source of capital for startup businesses. But angel returns on investment have mostly been a matter of speculation for investors and entrepreneurs alike.

Released Monday by the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation, the "Returns of Angel Investors in Groups" study claims to be the largest of its kind. The study shows that organized angel investor groups in North America have seen average returns of as much as 2.6 times their initial investment over three and a half years from investment to exit.

That's an average internal rate of return (IRR) of 27%, similar to the average IRRs seen by private equity investors such as venture capitalists, who usually get involved in a business at a later stage of growth and are therefore commonly thought to take on less risk.

"The data doesn't show that angel investors fail much more than VCs," says Robert Wiltbank, one of the authors of the study and professor of strategic management at Willamette University in Salem, Oregon. "Although by definition, they should fail more than VCs."

Wiltbank and his co-author, Warren Boeker of the University of Washington, analysed returns from 1,137 exited and closed investments between 1990 and 2007. The study was based on a survey of 539 individual angel investors affiliated with 86 angel groups across the United States.

The study confirms the old adage that high returns imply high risk. Seven percent of the exits studied generated returns of more than 10 times the initial investment, but as many as 52% of exits failed to recover the initial investment.

This may not come as a surprise considering that 45% of all companies in the study had no revenues at the time of first investment.

"Without a doubt, angel investing is extremely high risk," says Wiltbank. "Even when you're looking at the outcomes of just the investments that people actually like, you're still more likely to lose money than to make it. On the flip side, when it works out well it gets fantastic returns."

And the entrepreneur's return tends to track the investor's. "Angels rarely make good returns when entrepreneurs don't," says Wiltbank.