Do early-stage investors really enjoy rates of return three times better than public markets?
How much money do angel investors make investing in early-stage companies? Is it a genuine “asset class” with generally predictable returns, or just a potentially expensive hobby?
When Upstate Carolina Angel Network (UCAN) investors in Greenville and South Carolina Angel Network (SCAN) investors across South Carolina invest in a startup company, we have a specific return goal: to make a 50 percent or better annualized internal rate of return (IRR), which translates to 10 times our investment in five years (or four times in three years, etc.). We know that early-stage investing is highly risky: Startups often fail and take their investors’ capital with them. Factoring in the inevitable losses, we target a “portfolio return” of 20 percent IRR.
This compares to the annualized return (including dividends) of the S&P 500 over the last 15 years of around 7 percent. Do angels really enjoy rates of return three times better than public markets?
When you read about the fortunes of early private investors in Twitter or Uber, or founders like Mark Zuckerberg and Elon Musk, you see that sometimes they do. But those cases are news precisely because they are atypical. So what returns do “regular” angel investors expect, and what do they actually achieve?
Matthew Le Merle’s study, “Capturing the Expected Returns of Angel Investors in Groups,” released last December, answers the first question. From surveys of angel groups, Le Merle found that 55 percent of investors expect returns above 20 percent IRR, and the rest expect 10 to 20 percent IRR – better than public markets on average. This resonates with surveys of our members that show they are targeting returns of 20 percent or more IRR.