Success factors of early stage venture investing

image What are the factors that determine the success of Angel investing?  In the most comprehensive study of Angel investors, Robert Wiltbank and Warren Boerker have looked at the portfolios and exits of 539  Angel led investments, in a three year study conducted through the Angel Capital Education Foundation and the Kaufman foundation (study is here Returns to Angel Investors in Groups).  They gathered data from several prominent angel networks including the Tech Coast Angels in Southern California.  Their analysis provides interesting insights into the factors that determine success in early-stage venture investing.

First, the numbers: the average ROI on investments of individual investors who are part of angel networks is 27% on average, with 2.6x return in 3.5 years.  The returns are concentrated in a small number of investments with only 7% yielding more than 10x.

 

1.  Due diligence: the amount of due diligence conducted on an investment is a direct predictor of success.  It is clear from the study that a higher number of hours of due diligence relate to greater returns on the investment.  This confirms that the large number of hours that angel networks spend in due diligence, per deal, is indeed time well spent.

2. Expertise: The experience of the angel investor in the industry that they invest in is also correlated with the success of the deal.  The strength of large angel networks lies in the depth and breadth of the expertise of its members.  This finding regarding the correlation of investor experience with returns indicates that in angel networks, investments are best led by (or actively supported by) members who have specific domain expertise in the area.

 

3. Follow-up: Hands-on investors had a higher success rate than those who were less involved with their portfolio companies.  This finding certainly makes sense, as companies that are closely mentored and receive the benefits of the investor’s experience, are more likely to succeed.

 

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