Do Angels See a Return on Invested Time?

June 16 2010 No Commented

Do Angels See a Return on Invested Time?

As has been reported in an earlier post, angels with a diversified portfolio of invested companies should expect to earn about 25% IRR over a decade or so of angel investing.  A frequent question from new investors is: “but what is your return on time invested in portfolio companies?”

Angels invest time and money in start-up and early stage companies.  According to Professor Josh Lerner at Harvard Business School, the time we invest in our portfolio companies is actually more valuable to start-ups than our financial investment.  Experienced angels generally have half a dozen or more active portfolio companies at any point in time.  When ten angels fund a round of investment in a start-up company, only one or two engage with the company as mentors and/or directors.  Which two?  Those with the most appropriate background to assist in the start-up and growth of the company, of course!

Earning a return of 25% per year seems appropriate, considering the risk of failure of start-up companies (generally half of new ventures fail in the first five years).  But, if financial returns were their only objective, angels would more likely invest in hedge funds, commodity futures or other high-risk, high-return opportunities, all of which are all essentially passive investments.  Angels seek altruistic returns for invested time, such as:

  • They enjoy helping entrepreneurs, perhaps because a more senior businessperson mentored them earlier in their careers.
  • They want to continue to use and expand their business skills by helping start-up companies
  • They recognize the economic development implications that new ventures bring to local communities and are willing to share their business experiences with start-up companies to benefit the region.
  • They want to stay busy after retirement and are willing to help entrepreneurs grow new ventures on a part time basis.

Financial returns for invested monies – altruistic returns for invested time!

It’s a GREAT time to be an angel.  Find a group and jump in!