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May 16th, 2012 This is a follow-up to my post A simulation of angel investing.
Several readers commented on Hacker News that my first stab at a simulation was misleading because it showed negative average returns for low deal sizes, when in fact expected returns should be not only positive but constant regardless of deal size.
They are right.
I had been using payoff as the random variable, but rate of return as the measured variable. The formula for rate of return (x^(1/t)-1) places the most weight on the zero-payoff case (where return = -1.0), so the simulation results were skewed towards negative
. . . → Read More: A Simulation of Angel Investing, Part 2
May 16th, 2012 In angel investing, it’s the extreme distribution of payoffs that keeps things interesting.
If anything, it resembles buying a deep out-of-the-money call option, but with nonlinearity. If you win big you might find yourself in on the ground floor of the next Google or Facebook. That’s incredibly unlikely, but still possible.
More likely, you’ll end up with a solid 2x-5x return from a startup that grows into a viable long-term business. But most likely of all–by a long shot–you’ll lose your entire investment in another failed startup.
The most successful angels invest in a long series of deals over many
. . . → Read More: A Simulation of Angel Investing
May 9th, 2012 The Kauffman Foundation, which has ties to the venture industry, has issued a damning study of the business that addresses long-running concerns about poor performance and concludes that the limited partners who invest in funds have no one but themselves to blame.
The report, “We Have Met The Enemy…And He Is Us,” draws on lessons from 20 years of investing in venture capital by the foundation, which currently has about $249 million of its $1.83 billion portfolio allocated to venture. The Kansas City, Mo.-based organization promotes entrepreneurship and education, and is known in the venture world for creating the Kauffman
. . . → Read More: Kauffman Foundation Bashes VCs For Poor Performance, Urges LPs To Take Charge
May 5th, 2012 A majority of all new, angel-backed companies fail completely, so if you invest in only one company, the odds are that you will LOSE ALL YOUR MONEY, not just “not make a profit”.
Several studies and mathematical simulations have shown that it takes investing the same amount of money consistently into at least 20-25 companies before your returns begin to approach the typical return of over 20% for professional, active angel investing. This means the greater the number of companies into which the angel syndicate invests, the greater the likelihood of an overall positive return. [1]
Angel investing (like venture capital) follows
. . . → Read More: The reality of returns on angel investment
April 16th, 2012 In 2007, Professor Rob Wiltbank reported in Returns to Angel Investors in Groups that angel investors made follow-on investment in about 30% of their invested companies. It was surprising for me to learn that follow-on investments correlated with lower returns, that is, angels that made follow-on angel investments saw returns of 1.4X their investment, while those that did not make follow-on investments enjoyed 3.6X returns. The time to exit for both groups was similar.
. . . → Read More: Study Indicates Follow-on Funding Gives Lower Returns for Angel Investors
February 5th, 2012 Many “angel” investors, who put their own money into small start-ups at a very early stage, previously worked at technology icons that are known for minting millionaires, like Google Inc. and PayPal. But Silicon Valley’s angel-investor scene is far from homogenous, new data show.
. . . → Read More: ‘Angel’ Investors Exist Outside Tech Elite, Too
December 20th, 2008 Two previous posts: Venture Capital Firms are Too Big and Venture Capital Funds – How the Math Works, described how venture capital investors will wa
. . . → Read More: Venture Capital Exit Times and Return on Investment (ROI)
December 8th, 2008 All else equal, a venture-capital-backed entrepreneur who starts a company that goes public has a 30 percent chance of succeeding in his or her next
. . . → Read More: Performance Persistence in Entrepreneurship — Venture Success Statistics — HBS Working Knowledge
September 25th, 2008 ATP and angel investors provide significant funding for early stage technologies, where there is a capital gap between scientific and technical break
. . . → Read More: Does a Funding Gap Exist for Seed Stage and Startup Ventures? A Look at Angel Investors
August 17th, 2008 Interesting article on Angel investing in main stream press. Some statistics of investing provided as well as some short investing stories.
. . . → Read More: How Angel Investors Get Their Wings
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