Angel Investing: Was It Worth It? Part I
Part I: The Data
Angel investing is making an illiquid cash investment (usually $10K-$250K) in an early stage company, hoping for a good return in 5-10 years.
I have made 51 such investments over the last decade (in addition to the investments I made for Rock Health, a fund I started in 2011), but lately I’ve taken a break from angel investing which has given me the chance to review and reflect.
I wanted to answer the questions “was it worth it” and “am I even good at this”. In this article, Part I, I will share the data. And once I have more time to sit and reflect, I will share some of my key learnings from angel investing in Part II.
Let’s look at the data
For the sake of transparency, I wanted to share outcomes from my investments. I don’t think many angel investors do this, and perhaps I would have done things differently had I seen data from others when I was starting out.
I’ve heard several times that early stage investors expect to lose money on a third of the deals, break even on a third, and make all their returns on the last third. I wanted to know how my investments compared.
Overall, I’ve lost some or all the money on 21% of my angel investments. I’ve made money on 6% of my investments. And the jury is still out on the bulk of my investments which are still active, or were acquired/merged for stock. Of the 34 active investments, seven are valued at $1B+, and six are valued at $250M-$999M. But until there’s money back in my bank account, it’s too early to celebrate.
So have I made money angel investing? Yes I have made more money than I have invested. But the answer is a little more complicated than that. Let me explain.
Investments from 2012-2015
Since it takes 5-10 years for a company to exit, let’s take a look at my early investments — from 2012-2015 — which hopefully indicates what’s ahead for more recent investments. Here’s the statuses of the eight companies I invested in during this time period:
Three are active
Three exited (6.5x, 7.2x, and 20.8x ROI)
Two are deadpool (i.e. went out of business)
Realized return
The return on investment (ROI) on these companies overall (the amount I made / the amount I put in) is 7.5x. That’s a nice return, but you have to take into account the time it took these companies to exit: 3 years, 4 years, and 8 years. This is why you’ll hear investors refer to the Internal Rate of Return (IRR). IRR considers the context of time, which helps compare outcomes across asset classes (say, comparing angel investing to the stock market) and between funds deployed at different times.
The longer it takes for an investment to return money, the higher the expected return. The less liquid an investment is, the higher the expected return. So the bar for return on early stage startup investments is quite high. Generally, investors at this stage hope for 20%+ IRR at the seed stage. So did my investing meet that threshold?
Just looking at the cash returned so far, IRR from my 2012-2015 investments is 56%.
Unrealized return
Then there’s unrealized returns, or gains that are on paper. Until there’s an exit, the company’s valuation (as given to them by follow-on investors) gives you a decent idea of what your investment may be worth. Of the three companies in this cohort that remain active, one is valued at $1B+, one is valued at $150M (after a recap), and the third is hanging on by a thread.
Honestly, I don’t know what to expect from these three remaining companies from this cohort. Not only has my ownership been diluted over multiple funding rounds, but the current M&A and IPO market isn’t as favorable.
The good news for me is that even if these three remaining companies return $0, this group of investments had a solid return overall.
What happened in 2016? OPM.
So how did I go from making 8 investments in 2012-2015 to making 28 in the next three years? Here’s the secret: I became a scout. In 2016, I was approached by someone at a Top 10 VC (I’m not able to say which one) to join a scout program they had started. A scout program is an unpaid engagement where a VC gives money to an angel investor, and the angel investor gets to keep 20% carry* (after the VC is paid back).
*Carry is the share of profits from an investment that is paid out to investors, like a commission.
For example: let’s say a VC gives the scout $100K to invest in a company that returns $500K (5x the investment).
The VC walks away with their $100K back plus 80% carry: ($500K-$100K) * 80% = $320K
The scout gets 20% carry after the VC is paid back: ($500K-$100K) * 20% = $80,000
It’s a payout model similar to how VCs get carry, but unlike VCs who make handsome salaries, scouts are unpaid. So why did I do it? Before I became a scout, I would invest $10K-$25K per deal. So in the example above, I would have made $40K-$100K on an investment that returned 5x.
Becoming a scout enabled me to write bigger checks (and more checks) without the financial downside of losing my own money. It’s easier to spend Other People’s Money (OPM), and I made a lot of investments in those years.
In fact, I’ve invested over $2.5M of OPM since 2016, compared to about $250K of my own money.
Side note: I think more angel investors then we realize are investing OPM. The VC I was a scout for was adamant that I not share my affiliation, and I imagine others are the same way. I am no longer investing their money, but I’m still in touch since their back office helps manage the portfolio.
Investments from 2016-2018
From 2016-2018, I invested in 23 companies using OPM. Here’s the current status of these companies:
13 (57%) are currently active - and four of those are unicorns 🦄
Six (26%) exited
Four (17%) deadpool
The realized return is 0.08. That means for every $1 of OPM I invested, we’ve gotten back $0.08 so far. But I’ve actually gotten nothing, because as I shared earlier, I only get 20% carry after the VC is paid back.
So how is the realized return so low when six of the companies have exited?
Well, exits are often not as exciting as the press makes them out to be. Just take a look at details from the six exits from the 2016-2018 investment period that all exited between 2020 and 2022:
One of the exits was to a public company with stock restrictions so we haven’t been able to sell
Three of the exits were actually mergers where I now have stock in the new entity
Two of the exits returned less than I invested: 0.25X and 0.59X
Lately, the pattern seems to be more equity than cash M&A deals, only extending the payback period for angel investors. Regardless, the investments during this period are only upside for me since I used OPM.
Summing it up
% Active - percent of companies that are still in operation
% Exit (gain) - percent of companies that exited that returned more money than I invested
% Exit (stock) - percent of companies that exited for stock/equity, therefore value of exit has not yet been realized
% Exit (loss) - percent of companies that exited that returned less cash than I invested
Deadpool - percent of companies that shut down and returned nothing
Because startups take so long to exit, it’s really too early to tell if I’m a good angel investor or not. Looking at startups I backed from 2012-2015, my track record is pretty solid with a 7.5x return. That’s a higher return than the S&P 500, which returned 3.9x from 2012 to today. But keep in mind - stocks are more easily bought/sold, whereas with startup investing your money is tied up for a long time. Investing in startups is also really time consuming, which is why last year I shifted my strategy to become an LP (limited partner) in several VC firms.
This stuff is hard. And I’m constantly second guessing myself. Right now I’m in a moment of reflecting and learning. Stay tuned for Part II where I will share some of my key learnings!
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