Over the last years we have kept a close eye on success and failure factors for angel- and venture investments. We sometimes got into a quite bizarre discussion, whether angels or venture capital funds would perform better in early-stage deals – and thought it’s time to share our view.
Both types of investors have clear advantages speaking for them. While angel investors are generally more focused, closer to the founders, and in best cases very actively supporting companies in early stages, venture funds will usually have more fire-power and deeper pockets for follow-on investments. As a rule of thumb, betting on moonshots is not a good idea. Success stories with incredible blowout returns, such as Facebook, Amazon or Google are so rare they might as well be a fairytale.
The average returns for business angels and venture funds – overall – are pretty much equal. The annual return might differ, as we need to keep in mind that “average time to exit” has a significant impact on the annual return for investors. On average, an estimated annual target return of 20 to 25% is fair to aim for. There is only a small group of top-tier investors, in both worlds, which outperform this market average and those who manage to do so, likely invest in portfolios with 25 to 50 companies, with a rather hands-on strategy. For a single business angel, working from home (even full-time) that’s an almost impossible amount of companies to handle. In many cases they employ several people to assist them, which arguably makes them a small fund. In any case, the point is that taking the best out of both worlds will increase the chance of higher returns in startup investments.