How long does it typically take for an angel investor to receive a return on their investment?

This is equivalent to an internal rate of return (IRR) of 27%. The finding excludes the out-of-pocket expenses and personal time that an investor spends helping a fledgling company get off the ground. Ben Williamson told us that most venture capitalists expect to see a return on their investment in ten years or less. This means that they expect you to leave the company in ten years or less.

If you dig a little deeper into these studies, you'll discover that a high percentage of angel investment outflows result in little or no capital returned to the investor. A long-standing myth among investors is that up to 90% of new companies fail and fail. If you had that kind of failure rate in your exits, it's almost impossible to achieve an annual rate of return of 27%. However, research studies indicate a more optimistic failure rate of 60% after 6 years.2 In addition, investors with a robust due diligence process and post-investment support from their companies can reduce the failure rate from 60% to less than 50%.

Angel investors tend to act differently from venture capital investors, and the fact that venture capital investors have abandoned their initial investment does not necessarily mean that they have done so, since initial investments are inherently less attractive. These financial angels and advisors (or angel investors) are often responsible for the success or failure of a startup. In addition, entrepreneurs often hire expert lawyers to review, modify and negotiate investment contracts, and these lawyers can be an excellent source of information about potential angel investors. Many other investors participate in venture capital firms, but they are also engaged in angel investing for start-ups in which they personally believe.

It is based on more than 1,200 retired investments made by angel investors over a 15-year period, collected separately in North America and England. Angel investors can invest using a few different methods, such as a simple future capital agreement (SAFE), a convertible promissory note, a stock subscription, or a preferred stock subscription. Thanks to research supported by the Kauffman Foundation, NESTA (a business foundation based in the United Kingdom), the University of Washington and the University of Willamette, I have compiled the largest set of data on the financial returns of angel investors that exists. Angel investors are the preferred, and may be the only, source of large scale funding for many start-ups.

The interest aroused by Andy Rachleff's article suggesting that angel investors don't make money has been enormous. There is not much rigorous data on the profitability of Los Angeles, but most of the studies conducted to date converge on the idea that a diverse and professionally built portfolio of angels can generate more than 27% annual returns. And to really understand what it takes to be a successful angel investor from a purely financial perspective, you have to understand how exits work in this world. Angel investors are usually wealthy individuals or fellow entrepreneurs (rarely professional venture capitalists) who are willing to do whatever it takes to get a startup off the ground, which usually means money.

The most prolific and successful angel investors are part of a select group that has had a major impact in the United States. Angel investors seem to bring more variety to strategies when it comes to investing and creating companies, compared to formal venture capital.