Again, I’m one to just link around for the purpose of blogging, but I though some of you would find this article insightful.  Full credit to the author and his sources at the end.



With high-tech companies needing less capital due to advancements in technology, startup development methodology and online marketing, we have seen a Renaissance in angel investing. While angel investors participate in part for the excitement of engaging with entrepreneurs and placing bets on the future, they also do it for the expectation of significant financial returns. Various studies of angel investing published in the last decade estimate aggregate returns to angels on the order of 18-37% per year, well above market. The catch is that 50-70% of angels make less than what they invest. Returns are very unevenly distributed and this begs the question to what extent is portfolio theory fundamental to angel returns.

The best data set with detailed investment & exit information comes from the Angel Investor Performance Project by the Kauffman Foundation. The data was collected by surveying angels who belong to angel groups. Cleaning the data and restricting to the domain I was interested in—first round investments in early-stage high-tech companies—yielded a data set about the returns of 56 angels with exits from 112 companies. The data show the type of skewed distribution one would expect from early stage investing:

  • 75% of exits happened between 2001 and 2006. There is some reason to believe that the data may have a slight bias towards negative returns as 50% of investments happened between 1995 and 2000. Angels may have been buying high and selling low.
  • 3.2x cash-on-cash return for all investments put together (total dollars out divided by total dollars in). However, returns are extremely sensitive to big hits. A lucky angel put $600K in a software company in three rounds from 1988 to 1994. In 1996 the company went public and the person got a nice 55x return. Removing this one company from the sample drops the aggregate cash-on-cash return for all angels nearly in half to 1.8x.
  • Of the companies angels invested in, 63% were complete write-offs for the angels involved.
  • 66% of angels made less than what they invested. 45% generated no return. The remaining 21% of angels received only 4% of the total returns (7% if you exclude the 55xer).
  • 6% of the angels generated returns >10x that accounted for 68% of the total return (42% w/o the 55xer). The cash-on-cash return for that group was 36x with and 21x without the one big hit, in both cases more than ten times the average for all angels put together.
  • The data includes only one super angel who had 29 exits generating 2x return. Most other angels had one or two exits and only a handful had three or four.
  • Due to missing or overly granular investment and exit dates, it is practically impossible to calculate meaningful IRR numbers or to calculate returns in excess of financial markets.

The analysis suggests that angel investing as a whole can be quite profitable but, when dabbled into a deal or two at a time, it is more akin to gambling.

Without accurate data about angel investment portfolios, the next best option is to do Monte Carlo simulations of synthetic portfolios where thousands of hypothetical angels invest in thousands of hypothetical companies. The hardest part in setting up Monte Carlo studies is making good assumptions as they can pre-determine outcomes. Some have approached the problem by guessing probabilities of certain outcomes much in the same way VCs do basic portfolio presentations for LPs but with a bit more math in the mix. Rather than guessing, I chose to reverse-engineer a distribution of returns based on the data from the 112 companies. For the math-inclined amongst you, this involved piecing together a cumulative density function from three separate pieces: 60% chance of zero return, a logarithmic non-linear model for 0-10x returns and a combination power/exponential non-linear model for the long-tail of exits greater than 10x where not much data was available.

I ran a very simple Monte Carlo simulation evaluating the portfolios—ranging from 5 to more than 100 companies—of hypothetical angels. The average cash-on-cash return was right around 3.2x, exactly as with the Kauffman data, which is a good sanity check. Average returns don’t vary with portfolio size, which is to be expected.

Median returns vary substantially with portfolio size. Going from 5 investments to 10 investments increases median return by 68%, from right around 1x to nearly 1.7x. There are diminishing returns to growing portfolio size. Going from 10 to 15 increases median returns by another 40%. Doubling portfolio size from 15 to 30 adds another 50% but then in takes going all the way to a whopping 125 company portfolio to triple median returns compared to the 5 company portfolio. Similar conclusions apply with respect to other metrics. The probability of getting a return that’s greater than 2x doubles (from 34% to 69%) as one moves from a five company portfolio to a 50 company portfolio.

The data unequivocally suggest that playing like a super angel or an active seed fund as opposed to dabbling with the occasional angel investment is a key strategy to consider if financial returns are important. The data also call into question the behavior of some angel groups that do just a few investments per year.

This is not to say that volume investing—like throwing darts to pick stocks—should replace doing due diligence and the thoughtful development of investment theses. In fact, every Monte Carlo simulation of angel or venture investing I’ve seen, including mine, doesn’t take into account the various types of signaling that go on between entrepreneurs and investors and between investors themselves. For example, great entrepreneurs usually have over-subscribed investment rounds. A pure volume-oriented investor would find it difficult to compete for and win these hot deals, especially in a world where seed funds keep popping out like mushrooms after rain.

If you want to know more, let me know. I’m always curious to hear your thoughts. You can find me at @simeons or at FastIgnite.

Simeon Simeonov is founder and CEO of FastIgnite where he invests and helps entrepreneurs build great companies. Sim is also executive-in-residence at General Catalyst Partners and co-founder of Better Advertising and Thing Labs. Prior to that, he was a VC at Polaris Venture Partners and chief architect at Allaire/Macromedia (now Adobe). Sim blogs at, tweets as @simeons and lives in the Greater Boston area with his wife, son and an adopted dog named Tye.

I’ve never wanted this blog to be out linking around or posting others content, but from time-to-time I find that the written words of others do a better job than I could, or provide strong validation of a point I have made in a previous post.

The article below details how angel investors are going later stage and how companies are looking at angels as an alternative to traditional venture/private equity for expansion stage funding amounts up to $10 million.  The article also points out that angel funding was actually up in 1H08, despite the turbulent economic backdrop.

Interesting times.



CHICAGO ( — Fiberstar Inc., a small company that converts orange juice pulp into a line of food ingredients and other products, is no longer a start-up. Founded a decade ago, it now has a customer base of loyal multinationals and annual revenue in excess of $5 million.

At this point, the company might seem an unlikely candidate for funding from angels, the private investors who back start-up ventures with typical commitments of less than $1 million.

But that’s exactly who Minneapolis-based Fiberstar, which in the past has relied exclusively on angel investors for private equity, is going after to help raise up to $10 million for working capital and new production facilities to keep up with increasing global demand.

“Our goal is to continue to raise funding from angel investors and angel groups,” says Dale Lindquist, Fiberstar’s president and chief executive. “We’ve respected the investment that they’ve made and as management we’re trying to protect it.”

“It’s very unusual for a company to go as far as we have working solely with angels,” he adds.

It’s becoming less unusual, says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. Investing in more established companies is just one of several signs that angel investors are seeking a higher degree of comfort as they look for safer bets in a volatile economic climate, he says.

“The angels are doing post-seed – more later-stage work than they normally would,” says Sohl, noting that venture capital groups, which frequently fund private companies higher up in the development food chain, have also boosted their investment thresholds in recent months.

In a highly unpredictable economy, when credit markets are tight and traditional sources of capital such as bank debt have dried up or become increasingly difficult to obtain, angel investors are taking on more prominence as a source of alternative financing.

Total angel funding during the first half of 2008 has been surprisingly steady, rising 2.1 percent to $12.4 billion, compared to the same period in 2007, according to first half data released by the center earlier this month.

Sohl points out that the numbers also show that angels, who typically take preferred stock or other equity in exchange for their investment, are exhibiting increasingly cautious behavior.

The total number of deals funded in the first six months – some 23,100 according to data collected by the center – has fallen 3.8 percent. Meanwhile, the average size of each deal is up 8 percent, and along with it, the number of investors behind it. The center notes that the total number of angels participating in the first half grew 2.l percent to some 143,000, investing either individually or as part of angel groups. Fiberstar, the food and beverage company, has 152 angel investors.

“What this is telling us is that the angels are spreading out their risk a little more,” says Sohl.

Marianne Hudson, executive director for the Lenexa, Kansas-based Angel Capital Association, notes that she saw this trend begin to take hold last year. Her organization, comprised of more than 170 angel groups, saw average deal size in 2007 rise 10 percent to $266,000. At the same time, Hudson, whose members self-report their investing results annually, saw the average number of investors per deal rise to 55 from 44.

And while Hudson expects that trend to continue in the current economy, she sees another important signal of skittishness among her member groups: the increased use of loosely formed syndicates to jointly fund deals.

“We are seeing more and more angel investor groups co-invest with each other,” she says. “The angels are minimizing their risk.”

Angels will clearly remain an active source of capital as the economy worsens, say these and other experts on alternative sources of financing. Data show an increased appetite for sectors such as software, health care, manufacturing, green technology and other energy-related concerns.

But for start-ups and later-stage private companies alike, the latest numbers signal what will also likely be a very competitive field for a limited supply of investment capital.

“There’s more demand for us – we can pick and choose,” says Knox Massey, executive director of the Atlanta Technology Angels. “Somebody out there is not going to get funded.”

By Deborah L. Cohen
(Deborah Cohen covers small business for She can be reached at

Over the past 18 months, I’ve been exposed to a number of emerging consumer brands. There are very interesting companies reinventing traditional consumer services, those putting a new twist on an established space and those that are pioneering new niches. For companies that have a product orientation, we are seeing a new paradigm emerge. Gone are the days where a product could lead and demand would follow. Today it takes real marketing and advertising spend to drive sell through and institutional capital wants hard data that the risk they are taking is distribution risk, not product risk.

Beverage comps are a great example of this. Companies like Tazo Tea, Sobe and Oregon Chai raised minimal institutional capital. Odwall was the exception back in the early days raising $8 million from Catterton Partners. Contrast that to Izze, which raise more than $11 million from the likes of Sherbrooke Capital and Greenmont Capital, FRS, which raised $25 million from Oak Investment Partners and Radar Partners, and Honest Tea, which raised $12 million from Inventages, the investment arm of Nestle S.A. The reason this came to be, is that the money necessary to differentiate yourself from the competition has accelerated exponentially. For example, FRS utilizes Lance Armstrong as a spokesperson. I suspect that’s not cheap.

The problem, as previously alluded to, is that institutional investment funds that focus on consumer products, have been loathe to take product risk. If you ask them their ideal company metrics for a private placement and many of the traditional players will tell you $10 million in capital requirement and $10 million in revenue run rate, if not trailing. Notably, this investment class has been buyout in terms of its orientation. However, few companies can achieve the required growth sans institutional capital given the competitive environment. We call this the Consumer Capital Conundrum.

While well heeled investors in this space are morphing to fill the capital void, Catterton, historically a buyout fund, closed a $300 million growth equity fund in March of 2008. Swander Pace has countered with its “brands of tomorrow” (or future?) program. A number of permutations have ensued, VMG Partners, Encore Consumer Capital, etc. Health and wellness funds have filled this void for appropriately situated companies, as their interest tends to be piqued at between $3 million and $5 million in trailing revenues. That all notwithstanding, if you are a consumer brand whose revenue base is beholden to a national Whole Foods contract, you’re facing an uphill battle on the capital front. On a regular basis my partners and I meet interesting consumer brands with $2 million in trailing revenues who are seeking an agent for their $10 million Series B financing. So how do these companies survive until they are ready for institutional capital?

If my partner Tom Newell were here he would tell you that a sound capital development program starts with a focus on profitability. Let’s assume that you don’t have the luxury of the slow growth plan that Tom would advocate. Survival begins with an emancipated view of capital recruitment. Yes, it would be wonderful to find a handful of deep pocketed angels to see you through, and some do, but in the consumer arena this is a rarity, especially in markets dominated by technology investment. My advice to companies is two fold — a) don’t be above using organized angle groups to recruit capital and b) do not let you valuation get ahead of itself.

When I talk about organized angel groups to entrepreneurs, often times they make a face that one might make if they had opened a skunked bottle of Chateau Margueax. In reality, organized angel groups are providing an effective funding avenue to consumer oriented companies. As an example, Adina World Beat Beverages raised $5 million through the Keiretsu Forum. That’s not pocket change. Consider that angel investors placed $26 billion into companies in 2007 vs. institutional investments of $30 billion. Some say that angels account for another $10 – $20 billion in angel investments outside the organized reporting environment. For example, my wife and I have invested in her business outside of any regulatory reporting environment other than the IRS. Net net there is no shame capitalize your company $50,000 at a time. Keiretsu Forum, Alliance of Angels and others are delivering real value for companies by connecting them to angel investors without forcing them into an endless string of one-on-ones.

The second piece of advice to consumer companies I can convey is keep your valuation reasonable. Let me be clear, I am not saying bend to the whim of investors or agents. What I am saying is keep your valuations grounded in tangible business results. A large pre-money valuation on a de minimis revenue base only constrains capital recruitment. It might make your early money feel good about your progress to have an every increasing valuation on their incremental capital contributions, but it is only going to create a headache later when valuation is leveled by an institutional investor. A rule of thumb is don’t let you valuation exceed 3.0x revenue plus intangible value (brand value). I haven’t seen a situation where intangible value had exceed $10 million prior to $5 million in revenues, that’s not to say it can’t happen (see FRS). Net net, I ask that you simply bring realism into the equation.

Long short the consumer capital continuum looks as follows:

> Product Risk > Sub $3 million in revenues > Angels and angel groups

> Early Distribution Risk > Sub $5 million in revenues > Local VCs/small consumer capital/local VCs

> Distribution risk > $10 million revenue run rate > Mainstream consumer capital