Wednesday, November 28, 2007

Recent ACA Survey – The Returns and Success Factors of Angel Investing

The Angel Capital Associated recently released a survey on angel investor returns. They contacted 276 angel groups of which 86 responded to the survey. In short, the average return to an angel investor in the survey was 2.6x the investment in about 3.5 years yielding an IRR of 27%. These returns align well with other forms of private equity investing.

The three factors that influenced positive outcomes included:

1. Due diligence – more hours invested yielded higher returns.
2. Experience – more experience in the angel yielded better returns.
3. Participation – those angels who interacted with the entrepreneur several times a month yielded better returns.

The exits ranged from 52% of the deals losing money, 48% making money and 7% making 10x return or greater. The average amount of time spent on due diligence was 20 hours per deal, but some spent up to 60 hours of due diligence and saw substantially higher returns. Where investors spent more than 40 hours of due diligence experienced exits of 7.1X.

Angels who spent time with the entrepreneur 3 to 4x per month experienced a return of 3.7x in four years, while those who spent time with the entrepreneur only a couple of times a year experienced a 1.3x return in 3.6 years.

This information certainly backs up my own personal experience. Where I invest in deals in which I know the industry and actively work with the entrepreneur on the business, I receive greater returns compared to those deals in which I’m a passive investor and don’t know the industry at all.

If you would like to read the full report you can download it from the Kauffman site here.

Best regards,
Hall T.

Monday, November 26, 2007

Austin Inventors and Entrepreneurs Association—Valuations Anyone?

I had the opportunity to speak to the Austin Inventors and Entrepreneur Association. About thirty people turned out to hear my speech on “How to Raise Funding.” There were several entrepreneurs with cleantech inventions and even a few medical device developments. Led by Chris Ritchie the group meets to share ideas and information about how to successfully invent and launch new product ideas. The question of valuations came up as it does in many conversations. The more risk the entrepreneur takes off the table (product, market, IP, etc) then the better the valuation will be. There are some classical models for calculating valuation. If you have a cash-flow stream coming into the company, that can be used to value the company. Likewise, asset-heavy businesses can make a valuation based on the value of the assets. Also, revenue-streams could be used. If there are no cash, revenue, or assets, then comparables can be used. By looking at companies recently purchased one can determine the value of a business by comparing to a recently purchased company. This information is often quoted in the press and with a little digging through a trade or market research organization one can find the particulars about the purchased business and then extrapolate onto your own business.

Often times a valuation is placed on the business by the entrepreneur that is calculated based on the money sought to be raised and how much equity the entrepreneur wants to see at the end of the funding event. Based on these two numbers, the “valuation” is derived. If the entrepreneur is not incentivized then there’s not much of a future for that startup business.

I’m a regular listener of the Frank Peter’s Show podcast which highlights the angel and venture capital world of southern California. Recently, Frank had Luis Villalobos on the show who made the comment, that he has invested in over 60 companies in his angel investing career and every investment required substantial negotiations on the valuation. It’s not an easy question.

Best regards,
Hall T.