Follow up rounds
I read the Kaufmann 2016 Report about the investment performance of Angel Investors in the United Stated and I found some data reassuring, some data common sense and some data very interesting and food for thought:
The average IRR of Angel Investors is around 25% with an average Multiple of the Money invested of 2.5x.
Common Sense data:
Angels that spend more time in the due diligence of a potential investee company achieve much higher returns than not engaged Investors:
The Exit Multiple for High Due Diligence (over 20 hours) is 5.9x compared to a Multiple of 1.x for Low Due Diligence
Angels that invest in sectors in which they have a strong experience achieve higher return of Angel that invest in unknown sectors:
Investment in high expertise sector generated an average exit multiple of 3.7x compared to 1.3x exit multiple for not related deals.
Follow up investments destroy value:
Angels that invest in follow up deals generated an average return of 1.4x compared to a 3.6x return for Angels that do not do follow up deals.;
If we think about the typical seed and early stage investment the statistic make sense: in fact, on average 70% of the investments will return less than 1.0x the money invested and a follow up investment just increase by 70% the probability of a negative return;
However, one would expect that follow up investments are made with a much higher level of information about the company compared to the first investment (more financial data, better knowledge of the management team, higher understanding of the company business model, scale potential and competitive advantage);
More data should lead to better investment decision and higher return.
This seems to do not be the case. Few explanations:
Follow-up rounds are often priced @ a higher valuation. The Investor assume that his investment is growing and he is motivated to increase his stake in the game.
Data available to the Investor in the follow up round are scarce and of low quality;
The Angel do not realize that seed and early stage investment is a diversification game and double its investment in a start-up double the probability to lose all the money invested.
Note: You can download the Kauffman Report with the following link: