Little is known publicly about the exact outcomes of business angel investment and returns in the UK. Do they show a good return? Is business angel investment little more than a high risk game of chance?
Business angels are a source of investment in the early stages for small companies with high potential for growth. These companies are usually off the venture capitalists radar as the company and investment size is too small. The investments are typically at the low end of £100k or less, but there are cases where more is invested with some investments over £1m.
Recent research from NESTA shows:
The most likely outcome in any one angel investment is failure, but ‘winning’ investments are very attractive. Fifty-six per cent of the exits failed to return capital, while 9 per cent generate more than ten times the capital invested.
Because the 44 per cent of investments that generate positive exits win at a larger multiple than the costs of the negative exits, the overall return to business angel investing in the UK is 2.2 times the invested capital.
These 9 per cent large investment exits produced nearly 80 per cent of all the positive cash flows.
Given the holding period of just under four years, this is approximately a 22 per cent gross Internal Rate of Return (IRR).
In summary the investment is risky, but with the potential for some very attractive gains (i.e. the ability to generate more than ten times the capital invested).
The NESTA report does highlight the importance of a little background work before investing to reduce the risk in the investment. Just 20 hours of due diligence work results in significantly fewer investment failures as a result. I'm not surprised; 20 hours should at the very least highlight the "stop now" red light cases and areas that need more attention. Perhaps this is also connected to having a good team. The combination of good professional advice, an experienced business angel and a talented entrepreneur should make a good team and good teams have a knack of winning.