It’s not very often that angel networks disclose results. Most of us are ready and willing to discuss our approaches, beliefs or methods, but usually stop well short of providing the proof of our assertions.
Today, Golden Angels is publishing its internal rate of return calculation (IRR) that has been reviewed by independent accountants. From 2003 through 2016 year to date, it’s 16.87% on realized investments net of all costs to investors.
That’s 4 successful exits, 5 that returned less than the total investment, and 4 that went to zero.
In 2016, we’ve invested $4MM in 10 companies, averaging $400,000 per investment. Benchmark reports of venture investing suggest this is in the upper quartile of returns in this category of alternative investments. In total there are 18 companies we have invested in and have not exited.
There’s a lot we’ve learned achieving this result over the last decade, and, thanks to the recently published study by MIT and Harvard Business School on angel investing, we’ve got some benchmark practices to compare to.
This recent study by Josh Lerner of the Harvard Business School and Antoinette Schoar of MIT demonstrates that well structured angel groups not only pick the right companies to invest in, but they also improve the results of those companies disproportionately.
In the case of Golden Angels, its practices since 2003 have evolved to mirror Lerner and Schoar’s findings.
Angel groups have significant advantages over individual angels. Pooling funds allows angels to share diligence responsibilities. Acting as a group projects more visibility to entrepreneurs. And shared expertise makes for better decision making.
- It’s our shared expertise in decision making that has made a significant difference to us. We bring breadth of industry experience including significant expertise in healthcare; educational technology; finance, tax, accounting and law; software development; data analytics and its application; manufacturing; human resources and services; banking; corporate communications; executive coaching; sales; publishing and performance arts; real estate; water technology; and investment management.
Our 135 members come from corporate backgrounds, entrepreneurial ventures and professional practices. We expect their involvement on subjects they know and they add invaluable insights. Their orientation is to provide every entrepreneur with valuable feedback and connections, whether the investment fit is right -- or not. By building good relationships with every entrepreneur we meet, we think we’ve created a long-term benefit for them and for us.
- When we get to a deal, we pool our funds and use standard documents that are well accepted and straightforward. Experience has taught us that complicated provisions with non standard terms invariably create unintended consequences and suboptimal results. We understand the limited use of non-equity instruments. We’re pretty good at understanding tax planning and employ it to assist entrepreneurs and investors.
Firms selected by angel groups get a tremendous boost. Again, Lerner and Schoar: Companies selected for funding by angel groups were 20-25% more likely to survive for four years. In addition these companies were 16-19% more likely to have grown to 75+ employees and achieved a successful exit.
- In the case of Golden Angels, these successful exits have all been from companies with strong entrepreneurial leaders and significant Golden Angels involvement as board members, connectors and advisors.
- First and most important is the entrepreneur. This is who we are partnering with. Our investment means we believe in the entrepreneur and the team for the long haul. We’ve been fortunate to participate with several serial entrepreneurs and are on company #2 with three of the entrepreneurs from our successful exits.
- We are not a managed fund. We believe our pooled expertise provides more benefit to us than a fund with one manager and passive investors.
- When asked by entrepreneurs to serve on boards, we take responsibility as directors very seriously. Golden Angels requires its directors to attend director seminars that outline the appropriate role for directors and their responsibilities to all of the shareholders of the company, not just the investors. We have also recruited independent outside directors to fill critical slots where our expertise needs to be supplemented.
- We connect resources to companies from our collective rolodex. That’s lots of people in many roles.
- We’ve successfully introduced Venture Capital firms to these companies to provide additional capital and connections. Because we think we understand the goals of venture capital and its interests, this has consistently worked for the companies and the eventual outcomes.
- We coach carefully always with a view to what’s going to be helpful to the entrepreneur. This often means asking a lot of questions, encouraging exploration and offering connections to others with more knowledge. We try and earn the respect of entrepreneurs by walking the talk.
- At an exit, we try and provide experience to assist the entrepreneur in getting at least a market deal.
We have, over the years, always been biased away from small investments in lots of companies and toward larger investments in fewer companies. For whatever reason, this has worked well for us. Whether there is any direct correlation to success or not is a matter of discussion.
- Of course, several investments made in companies did not succeed because of technology changes or outcomes that did not create a sustainable market.
Some Angel Groups actually outperform venture capital. While this may be true, depending on how you choose to measure what “venture capital” performance means, Golden Angels believes that venture capital often serves a complementary purpose in entrepreneurial investing. The ability to understand deal terms and structure, to align investor interests, and to be good partners with venture investors, we believe, best serves the interests of the entrepreneurs and all of the stakeholders. In fact, we are limited partners in two Silicon Valley Venture Capital firms. In addition to the investment in these funds, they also share deals and have co-invested in several instances.
Planning For The Future
In response to many requests, we’ve created a program, Golden Angels Advisors, to build a community of early to mid career professionals with an interest in startups and investing that complement and extend the expertise of the network.
This group provides an opportunity for the next generation of investors and advisors to get inside the process and meet other experienced investors and entrepreneurs.
Members participate in startup company reviews and applications, as well as ongoing involvement. They’re scouts for good opportunities for both the network and entrepreneurs.
We’re a member owned organization with a board that sets the direction of the organization. Between the member expertise and board structure, Golden Angels is ready for the next generation of investors and entrepreneurs.
Tim Keane, Director of Golden Angels in Milwaukee, WI was the founder of RTMS, Inc., a retail data analytics company. Contact him at tim@goldenangelsinvestors.com