Angel investors are wealthy individuals or organized investor groups that fund early-stage startups in the hopes of making money on their investment. How much money angels make depends on many factors, including the success of the nascent business they back, the size of their equity stake, and how long they’re willing to wait for a potential payback through an exit.
But because angels aren’t required to publicly report on their deals, it’s hard to have exact data on returns. Only a few studies have attempted to quantify this. Exits that lead to an angel’s profit take years or even decades—if they occur at all. Over time, the available data can become less relevant to the current investing environment. These factors can complicate the question of how much money angels make.
Calculating angel investing returns
Angels who want to quantify how much return they’re getting from their investments can use three measures.
- Exit multiple. This simple calculation measures the total cash an investor takes out of an investment divided by the total cash they put in. An angel who invests $50,000 and gets $150,000 back, earns an exit multiple of 3 times their investment, or 3x.
- Internal rate of return. IRR shows the annualized percent return an angel company or fund has earned, or expects to earn, over the investment’s life. Unlike an exit multiple, the IRR considers the time it takes to generate the return, which makes comparing investments easier. The higher the IRR, the better an investment is performing. An investment that generates a 10x return over 7 years will produce a higher IRR than one that generates a 10x return over 14 years.
- Total value to paid-in capital. TVPI attempts to calculate the total value a fund produces relative to the money investors contribute. It considers both realized and unrealized profits and losses. A TVPI above 1x means the investment grew in value. A TVPI of 1.25x, for instance, means that every dollar an investor contributed generated a return of $1.25, or 25%. TVPI doesn’t consider the time value of money. A TVPI of 1.25x in one year is better than, for example, the same TVPI in five years. Investors will see a 25% annual return over one year; over five years, the 25% will equate to an annual rate of return of roughly 4.6%.
How much do exits generate in returns for angels?
Professionals who analyze angel investments widely cite one national study: The Ewing Marion Kauffman Foundation and Angel Capital Education Foundation released in 2007. It tracked 539 investors in angel associations over 20 years and covered 1,137 exits made through acquisitions, initial public offerings, or company closings. Most of the exits occurred after 2004.
The research determined that angels recouped an average 2.6 times (2.6x) their original investment in 3.5 years. This equates to an internal rate of return (IRR) of 27%. The finding excludes out-of-pocket costs and the personal time an investor devotes to help a fledgling company off the ground.
“Tracking Angel Returns,” follow-up research the Kauffman Foundation backed, was updated in 2017. It estimated cash returned to angels at 2.5 times their investment. These investments covered a mean of 4.5 years and produced a 22% return.
There are many types of exits that can lead to an angel making money. Mergers and acquisitions have dominated angel-based exits since the 1980s, the Angel Capital Association, a group of more than 15,000 accredited angel investors, reported in its ACA Angel Funders Report 2020.
Initial public offerings (IPOs) generate the highest paybacks, the report found. IPOs provided a median return of three times an angel’s investment. The higher average returns can be misleading because IPOs are rare, and a few outsized deals contribute most of the profits, the report noted. Among all angel investments, 10% of the exits produce 90% of the cash returns.
Angels earned a median of 1.6 times their investment in 2019, according to the ACA’s 2020 report. The median exit multiple remained strong in 2020, at 1.8 times invested capital.
Factors affecting angel investing returns
Angel investors typically want to beat those returns. Investors dream they’ll fund the next Uber, which turned $5,000 investments into multi-million-dollar windfalls.
“The American Angel” study published in 2017 found that angels typically want to exit in five years and get back 9x of the money they invested. This is optimistic, the study noted, since exits had multiples of less than 5x around that time.
Angels hunting for bigger profits can improve their returns in several ways, according to Kauffman research. The following factors led to higher returns:
- More due diligence. Angels who devote more time to evaluating a startup’s financial health and commercial potential see better returns.
- Angels who spend less than 20 hours evaluating a deal realize an average return of 1.1 times their capital investment.
- Those who spend more than 20 hours have an average return of 5.9 times capital.
- Angels who spend more than 40 hours enjoy an average return of 7.1 times capital.
- Industry knowledge. Expertise in the startup’s industry correlates with higher returns. Investment multiples were twice as high when angels invested in startups connected to their professional or personal expertise.
- Ongoing participation in the startup. Interacting with the startup often generated higher returns. Angels who interacted with their companies at least a few times a month saw an overall return of 3.7x in four years. Those who touched base only a few times a year saw just a 1.3x return in 3.6 years. Participation included mentoring, coaching, providing leads, and monitoring performance.
- Amount of companies in a portfolio. An angel portfolio with more companies enjoyed higher returns than those with fewer companies, a study by AngelList found. The study reported:
- Portfolios with one to five companies had a median internal rate of return (IRR) of 0%.
- Portfolios that had ten companies had a median IRR of about 6%; 32% of investors lost money.
- Portfolios with 20 companies had a median IRR of about 7%; 16% of investors lost money.
- Portfolios with 50 companies had a median IRR of about 10%; 11% of investors in these companies lost money.
Benefits of diversifying angel investments
Just as angel portfolios with more companies deliver higher returns, so do those that invest in a diverse range of industries, studies show. This helps cushion against sector-specific upheavals like a dot-com crash. Diversification also tends to even out overall returns.
Individual angel groups spread their investments among more deals in 2020, the Angel Capital Association found. They invested in 19 deals in 2020 compared to 14 deals in 2019. Technology and life sciences drew the most angel dollars, though investors expanded into other sectors such as edtech and cybersecurity.
Research published in 2020 shows a positive relationship between a portfolio with a mix of industries and that portfolio’s performance. The study of 142 members of a professional angel investment platform found that angels can adopt moderate levels of industry diversification. However, they should avoid too much industry variety because it can stretch their expertise and attention, the study found. The study also said that angels who have a diverse network of industry specialists tend to do much better at higher levels of portfolio industry diversification.
The researchers found that although returns may vary across portfolios with low, medium, and high levels of diversification, 43.26% of the angels they studied from 2013 to 2017 achieved an average internal rate of return of more than 50% across all diversification levels. The authors concluded that angel investing “should be considered a diversifiable asset class” and said that “building a moderately diversified portfolio may allow angels to achieve superior returns.”
The bottom line
Angel investors have historically received returns that average 22% to 27%, or about 2.5 times the initial money they invest, two major studies suggest. However, the data is limited, and about 10% of exits account for 90% of angel profits. The majority of angel investments are in companies that go bust, which means angels lose their initial investment and make no gains.
Actual returns range from zero to multiples of many hundreds in angel-backed successes like Uber. Angels can increase their chances of bigger returns by expanding and diversifying their portfolios, devoting time to due diligence, and providing their hands-on support and professional knowledge to get companies off the ground.