At Loon Creek Capital, we're woking with the California SBDC and the founder of the Seattle Angel Conference, John Sechrest, to bring angel investing conferences to Central California. These conferences are a mix between a demo day for entrepreneurs, and an accelerator for new investors. A group of 30 or so investors each invest roughly $5,000 into a fund and then agree to put all of the fund money in a single company. The company that is vetted through a pitch event. Over the course of about 90 days, the investors meet to screen roughly 60 applications, listen to pitches, pick six finalists, conduct due diligence and negotiate terms. The six finalists pitch at a demo day event, and after each pitch the investors present their due diligence findings as well as ask the founders some additional questions. The group of investors then takes 30-45 minutes to decide which company will get the money. The audience gets to see pitches, due diligence findings, and witness the investment decision, while the investors leave with a portfolio company (the first one for some).
The model John has invented is creating new angel investors every year, so many that an annual fund has formed and others are in the works. A few weeks ago we were hosting an information panel on the conference in San Louis Obispo, California and the question of returns came up. It's a really good question. Investors should always ask about returns. After all, the money invested needs to give a great return so we keep investing. However, returns on the conference model are a little tricky to measure since each conference is, in essence, its own fund with only a single investment. Additionally each conference is comprised of a very different group of investors, so trying to track the conference returns as a portfolio is challenging. We asked John to weigh in on this and he wrote a great blog about it posted here: Seattle Angel Conference Blog. I've also posted his blog below. Thanks John!
When we talk to people about the Seattle Angel Conference, there is often a question about the previous returns that we are seeing from our efforts with our previous Angel Conferences. This is actually a hard question to answer in a couple of ways.
The main hard part of the question, is that is makes assumptions about Angel investment that are not particularly helpful early on. There are features of Angel Investing that make it different than your regular old stock market investing that people who ask this question are trying to compare against.
Rob Wiltbank and Wade Brooks at Willamette University have been studying Angel Investing and have collection some of the best data available. If you look at their data, you can get a more comprehensive set of data about general angel investing.
Out of that we learn that exits tend to take some time. Sometimes a long time. The typical expectation is that the Angel Investments make it to exit in 7-9 years. If you factor in that the ones that fail, tend to fail early, then the ones that win will tend to be later... even later than 7-9 years. So given that the Seattle Angel Conference is 5 years old. We would expect a few failures and no wins.... And that is where we are at….We have a list of companies and regularly track their progress. Over the last 10 cycles (5 years)
We have about 21 investments, depending where you draw the circle. We have deployed about $2M. And we have educated more than 200 Angel Investors.
Out of those efforts, we've seen:
Out of every 10, you will see 9 not give enough money back. You need to be in 20 deals to have a good chance of winning.
This assumes you do good due diligence, remove the bad ones and only start with very very very good companies at the beginning. However, more importantly, the Seattle Angel Conference is not about returns. It is about learning. While it can be risky if done wrong, Angel Investing overall seems to produce some interesting returns, as we see in the Wiltbank data.
What are the habits and behaviors that make it more likely that you will achieve those types of returns?
We believe that Angel Investing process can produce good returns if you engage it well. You can explore the Halo Report from the Angel Resource Institute and see that overall Angel annualized returns look like 25% / year. But these returns are not evenly distributed at all. More than 60% of the companies loose some or all of the money invested. Close to 30% provide some returns, but not a lot. So this is not a normally distributed return profile.
More importantly for the Angel Conference model, the process is a bit overly structured to make it possible to create more learning about the process of investing. So those companies that are exceptional, have previous experience, know the network of investors and have great momentum….They are already connected to people and are quick to get funding. So the angel conference never will be about optimizing the returns. Instead, it is a very low cost, simple way to get a deep look into the process and to learn about the issues that make Angel Investing interesting. And to see first hand some of the issues that are hard to deal with and deserve significant consideration before proceeding on a deal.
For New investors, who have never been inside an Angel Investment, it is a great way to gain perspective about the market, the structure of companies, and to build relationships in the market. It is the expectation that alumni investors of the Seattle Angel Conference will learn a great deal about their investment thesis and where they want to engage. And then will move on to the other Angel groups that match their goals.
If an early focus on returns is the highest priority for the investor, then it is likely that the risk profile is one of low risk and this may not be appropriate to engage in the process of Angel Investing.
To repeat a bit:
There are other Angel Organizations in Seattle that have a much stronger focus on building an opportunity for good returns:
There is some data about how they are performing here: (2015)
Every April, the MIT Forum has been doing a “Meet the Angels” workshop, where folks talk about how Angel Investing works
Other references and interesting information
Wade Brooks - http://willamette.edu/mba/faculty-research/faculty/brooks_w/
Rob Wiltbank - http://www.willamette.edu/~wiltbank/
Angel Investing Returns - http://www.willamette.edu/~wiltbank/angel_performance_report.html
Angel Investors do make money - https://techcrunch.com/2012/10/13/angel-investors-make-2-5x-returns-overall/
Angel Resource Institute - Halo Report - https://www.angelresourceinstitute.org/