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Want more angel investing in the UK? Then let’s talk about returns

25 points by pmjordan 16y ago

revorad 16y ago
Direct link to the cited UK report Siding with the angels - http://www.bbaa.org.uk/library/file/BBAA_NESTA_Siding_with_the_Angels.pdf http://www.bbaa.org.uk/library/file/BBAA_NESTA_Siding_with_t.... Key extracts: "...drawn from a survey of 158 UK-based angel investors in late 2008. They have invested £134 million into 1,080 angel investments between them, and have exited 406 of those investments. Fifty-six per cent of the exits failed to return capital, while 9 per cent generate more than ten times the capital invested. 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)."
- Ardit20 16y ago
  Not quite such substantial returns then unless you are one of those 9%. I suppose however there would be some sort of trial and error. So the guy who got this ten times return probably had to invest in ten companies or so. Thus, we perhaps do not quite know the real return on general.
  - adamt 16y ago
    "Not quite such a substantive returns then" 22% (per annum) is a pretty substantive return for an asset class across a sample of 406 investments over over a 4 year period. As other posters have commented - it would be interesting to see data over a 2008-2010 period to see if it has changed adversely since then.
  - pmjordan 16y ago
    Thus, we perhaps do not quite know the real return on general. [sic] I think you may have misinterpreted the figures. The 22% average figure already includes the non-performing startups. Obviously there will be variations for each investor, depending on how good they are at picking winners. The top 9% of investments generate 78% p.a. returns or more ("at least 10 times"), assuming the 4 year period average applies to them, too: 10^(1/4) = 1.778 -> ~ 78%
    - Ardit20 16y ago
      What I meant is, how much would all the investments that an investor has made add to his bottom line. The extract by the poster above states that 80 of the positive return is generated from only 9% of all the investments. It also states that 56% of the investments do not return capital thus -, that would then leave us with 35% of the investments which returned 20% of all the positive returns. So for an average investor, he might invest in one of these companies which return negative capital, or two, or three, or ten, and only one of the companies which return ten times on the investment. So it could be that some investors are making very good returns, some very bad, some just meagre returns. Just giving an average number doesn't quite help. It is like saying the average high school grade is C. That hardly says much about an individual student. So too the data hardly say much about an individual investor or specifically whether to invest in such companies is a good return for someone with cash, unless of course you are able to invest in all the 1000 companies. I personally think it probably is a good return to invest if you have great business knowledge, but seeing as 56% do not return capital, its a greater possibility that it would not be a good idea to invest in the companies. But then, of course, as I say we would need the data to know for certain.
      - pmjordan 16y ago
        I think what you're getting at is that Angel investing isn't comparable to buying into an index fund or so in that it's not an investment strategy for the general population. You need domain knowledge in the area you're making the investments, and it'll take some experience before you get good at it. And some people will have more talent for it than others. I don't think there's any argument about that. The rest of what you're describing are just statistical phenomena, though. As the source says, the distribution for returns on individual investments is very lopsided and far from normal (Gaussian). Early stage and VC funding are risky but potentially high-return in nature. Overall, you'd need a large sample size to approach any sort of predictable pattern on returns [1]. And you'd better be prepared to lose all the money you put in. [1] http://en.wikipedia.org/wiki/Central_limit_theorem http://en.wikipedia.org/wiki/Central_limit_theorem
        16y ago
AlexMuir 16y ago
Survey done in late 2008? That's pretty much at the peak surely, I wonder if it's down as the exit routes are largely shut, or up because other investments are offering lower returns.
vmind 16y ago
While there should be more promotion and emphasis on the returns of angel investing in the UK, I think it's fairly tenuous to take a report on the market as a whole, which lacks a focus on returns, as evidence that investment is being discouraged. Especially when quoting return figures from a report commissioned by the same department.

25 points by pmjordan 16y ago

Direct link to the cited UK report Siding with the angels - http://www.bbaa.org.uk/library/file/BBAA_NESTA_Siding_with_the_Angels.pdf http://www.bbaa.org.uk/library/file/BBAA_NESTA_Siding_with_t.... Key extracts: "...drawn from a survey of 158 UK-based angel investors in late 2008. They have invested £134 million into 1,080 angel investments between them, and have exited 406 of those investments. Fifty-six per cent of the exits failed to return capital, while 9 per cent generate more than ten times the capital invested. 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)."

Ardit20 16y ago
Not quite such substantial returns then unless you are one of those 9%. I suppose however there would be some sort of trial and error. So the guy who got this ten times return probably had to invest in ten companies or so. Thus, we perhaps do not quite know the real return on general.
- adamt 16y ago
  "Not quite such a substantive returns then" 22% (per annum) is a pretty substantive return for an asset class across a sample of 406 investments over over a 4 year period. As other posters have commented - it would be interesting to see data over a 2008-2010 period to see if it has changed adversely since then.
- pmjordan 16y ago
  Thus, we perhaps do not quite know the real return on general. [sic] I think you may have misinterpreted the figures. The 22% average figure already includes the non-performing startups. Obviously there will be variations for each investor, depending on how good they are at picking winners. The top 9% of investments generate 78% p.a. returns or more ("at least 10 times"), assuming the 4 year period average applies to them, too: 10^(1/4) = 1.778 -> ~ 78%
  - Ardit20 16y ago
    What I meant is, how much would all the investments that an investor has made add to his bottom line. The extract by the poster above states that 80 of the positive return is generated from only 9% of all the investments. It also states that 56% of the investments do not return capital thus -, that would then leave us with 35% of the investments which returned 20% of all the positive returns. So for an average investor, he might invest in one of these companies which return negative capital, or two, or three, or ten, and only one of the companies which return ten times on the investment. So it could be that some investors are making very good returns, some very bad, some just meagre returns. Just giving an average number doesn't quite help. It is like saying the average high school grade is C. That hardly says much about an individual student. So too the data hardly say much about an individual investor or specifically whether to invest in such companies is a good return for someone with cash, unless of course you are able to invest in all the 1000 companies. I personally think it probably is a good return to invest if you have great business knowledge, but seeing as 56% do not return capital, its a greater possibility that it would not be a good idea to invest in the companies. But then, of course, as I say we would need the data to know for certain.
    - pmjordan 16y ago
      I think what you're getting at is that Angel investing isn't comparable to buying into an index fund or so in that it's not an investment strategy for the general population. You need domain knowledge in the area you're making the investments, and it'll take some experience before you get good at it. And some people will have more talent for it than others. I don't think there's any argument about that. The rest of what you're describing are just statistical phenomena, though. As the source says, the distribution for returns on individual investments is very lopsided and far from normal (Gaussian). Early stage and VC funding are risky but potentially high-return in nature. Overall, you'd need a large sample size to approach any sort of predictable pattern on returns [1]. And you'd better be prepared to lose all the money you put in. [1] http://en.wikipedia.org/wiki/Central_limit_theorem http://en.wikipedia.org/wiki/Central_limit_theorem
      - 16y ago

AlexMuir 16y ago

Survey done in late 2008? That's pretty much at the peak surely, I wonder if it's down as the exit routes are largely shut, or up because other investments are offering lower returns.

vmind 16y ago

While there should be more promotion and emphasis on the returns of angel investing in the UK, I think it's fairly tenuous to take a report on the market as a whole, which lacks a focus on returns, as evidence that investment is being discouraged. Especially when quoting return figures from a report commissioned by the same department.