The million dollar question, no doubt. If our economy demands more entrepreneurs, and access to credit is scarce, convincing more rich people to bet their money on high-growth potential companies, becoming business angels, is critical.
The usual way is to tell popular stories about earnings of millions in profits such as what Google, Skype or Tuenti returned to their investors. However, these cases cannot be representative. Do we not have other arguments with more general consequences to recruit new angels?
Unbelievably, we seldom use the most logical reason: investing in start-ups is profitable and you can earn an average of X Euros per deal.
This is not done simply because there are still very few studies that have analyzed angels’ profitability, a situation that is made worse since only 15% of them agree to disclose that data, and we must wait at least 4 years to get to know the real value of the exit option. However, competent international organizations (OCDE, GEM, EBAN, ACI, CfVR, Kauffman Foundation) state that 35,000 companies receive 5,600 and 21,000 million dollars per year from European and American angels, respectively. 56% of these deals fail, 35% recover between 1 and 5 times the amount invested, and 9% multiply their investment between 5 and 30 times. Finally, it is calculated that the optimum balance between risk and profitability is obtained by a portfolio of 20 companies, with an internal rate of return of 22% and a 4-year exit; that is to say, in average the invested capital is multiplied by 2.2.
Sounds nice, but there are some issues: profitability data comes only from 2 of the most advanced markets in the world (US and Great Britain), 24% of investments were basically motivated because of tax exemptions, and the historic disinvestment shows that the possibility of a total loss or that the risk is not compensated reaches 65%.
The conclusion is yes, becoming a business angel is profitable… provided that failure is controlled while waiting for the winning ticket. And this is only obtained either by investing in markets we can influence or by coinvesting with public or private co-investors, supported by professional managers, to raise as much capital as possible to build a diversified portfolio.