According to an article I was covered in this weekend in Finansavisen (“The Financial Times” of Norway), Angel Investment is giving an annual return of 13% – beating most other investment methods. The title of the article is related to a research performed by the consulting firm Impello Management. They looked at a certain region in Norway, and analyzed the angel investment scene and the return over the past years. It turned out to be at 13%. The numbers match research made by The Angel Resource Center in the US, stating that angel investing returns about 2,5x over a period of 5-7 years.
Angel investing is considered high-risk. There is often no proven business model and no track record of customer retention, as well as other parameters investors normally look for when assessing potential new investments.
To be successful and reach a ROI of 13%, it really boils down to two things (assuming you have a decent deal flow already):
- Qualification of deal flow
- Diversification of your portfolio
Qualification of deal flow
Most professional angel investors will advice you to focus your investments on an area of expertise you know well from before. This way, you have a better way to assess the product/market fit of the business. I have really only met one obstacle with this approach, and that is that one may end up becoming overly problem-oriented towards ideas that touches on something you know a lot about.
The best way to minimize risk, is probably to team up with other investors. Then all of you can lean on each other´s know-how, and you are better equipped to make the right investment decisions. With this approach, you should embrace sharing knowledge and working closely together with other investors. The article also touches on this “pay-it-forward” mentality of the startup scene, that also should be used on the investment side.
Diversification of your portfolio
There is not one right way to diversify your portfolio in angel investing. The general “rule”, is that you are invested in enough companies that do different things. As I am still building up my portfolio, I know it is still a little slim. With my current investment base, I will probably have a hard time reaching the recommended 20+ startups to reach a really diverse angel portfolio before a few years from now.
However, diversification can be a lot, such as geographical, industrial, product spread – but also maturity of the company. If you start from scratch like me, you will need to have patience building your portfolio. Over time you will have investments in companies that are in different life cycles in their maturity stage, which means you obtain a naturally diversification of the portfolio over time.
Over the past years, it has become easier to start up new companies, due to many positive changes – like an increase in public grants towards startups, more accessible technology through the cloud and APIs, a desire among people to work for startups, etc. Here in Norway, we see the startup scene flourishing. Now, we need to ensure that the investment scene is also flourishing. There are many stages a new business will go through in its lifecycle – and there is no doubt angel investment has an important role on that path.
My introduction to angel investing started about 5 years ago, when I invested in my first early stage startup. I became even more familiar with the concept and learned a lot through taking part of an angel investment / startup program called Angel Challenge. They have programs in several Norwegian cities, and a very good way to get started if you are not familiar with startup investing from before.