November 16, 2007

Survey says? Involved Investors are Best

The Kauffman Foundation just released a study reporting that angel investors are making 27% on their investments over 3.5 years.

A few more interesting stats form the study:

  • 52% of all investments returned less money than invested
  • 39% of all portfolios returned less than the original investment amount
  • 7% of investments returned 10x the original investment, accounting for 75% of the returns reported in the study
  • Investors with experience in the industries they invest in typically received returns nearly twice as high as those with no experience
  • When investors did less than 20 hours of due diligence on a deal, they lost money 65% of the time
  • Investors who did 40+ hours of diligence prior to investment returned an average of 7.1 times their money (I learned today that the Tech Coast Angels do an average of 500 hours of due diligence before making an investment.)
  • Investors who provided mentoring and guidance to their portfolio companies one or two times per month received better returns on their investments

What does this mean to entrepreneurs?

You want to increase your investor’s return on investment as much as she does, so make sure she is spending time with you once or twice a month. If you don’t have an investor yet, look for those with a track record of spending time with their portfolio companies.

Look for investors who have experience in your field. It’s tempting to go for the easy money from the doctor or dentist who will just give you the cash and back off. Don’t fall for that trap. An investor with domain expertise will increase your return on investment as well as theirs.

Today I spent the afternoon learning at the feet of Luis Villalobos, the Obi Wan Kenobi of angel investing. He has invested in more than 60 companies, started the largest angel group in the U.S., started the Angel Capital Association, etc. Now he’s raising a fund to co-invest with angel groups throughout the U.S.

Throughout his presentation he stressed the importance of investor involvement in startups. He said that he has never invested in a company that was fully ready for investment the first time it pitched investors. Even during the due diligence phase, TCA members are working with entrepreneurs to shape their business model into an angel-ready one.

So if you’re looking for an investor, make sure he’s ready to get his hands dirty. If you’re an unengaged investor with an average portfolio, don’t just stand there — get involved.