These Truths About Angel Investing Will Surprise You

Scott Shane, one of the world's most respected statisticians regarding entrepreneurship and angel investing, has a new book out - "Fools Gold? The Truth Behind Angel Investing in America."  It is without question the finest compilation of statistics and cold, hard facts regarding the REALITIES - as opposed to the myths - of the keys to successful angel and emerging company investing.  Some amazing statistical nuggets from Scott's book:

• The book's 12 chapters have a combined 692 source references!  Compare this to the average "this is what I think with absolutely no basis in numbers" opinions that pass for wisdom on CNBC, on the world of Internet financial blogs, and from your friendly neighborhood financial advisor
• Average portfolio return for angel investors participating in organized angel groups: 27% annual return (quoting this study)
• Return expectation per deal for investments by successful angels: 30x
• Proportion of business angels that expect a 10 times or better return: 45.4% (what they actually get is another matter...)
• Number of companies founded each year that achieve $10 million or more in sales in 6 years: 3,608
• Number of companies founded each year that achieve $100 million or more in sales in 6 years: 175
• Share of drug start-ups that go public: 20.3%
• Portion of venture capital dollars invested in the top five industries for venture capital: computer hardware, software/Internet, semiconductors and other electronics, communication (including mobile) and biotechnology - 81%
• Top reasons why people invest in private companies:  To make money (obviously), to learn new things, to pay it forward
• Number of companies financed by business angels in a typical year: 50,700-57,300
• Amount invested by business angels in a typical year: $23 billion
• % of Angel Investors with net worths of LESS than $1 million: 66.7% (really an amazing statistic as the SEC definition of an accredited investor is a person with a net worth of greater than $1 million)
• 45 to 54 - Age range with the highest odds of making angel investments - disputes the myth that most angel investor are retired
• Proportion of angel investments that involve co-investment with VCs - less than 1.1 percent
• Proportion of angel investments made in retail and personal service businesses - 37.5 percent.  (Note: If you just make a rule to NOT invest in these 2 areas, your probability of emerging company investing success goes up dramatically)

As working with and investing in entrepreneurial companies is my life's work, I read this book extremely closely and found it both invigorating and challenging.  Invigorating in that it confirmed, with statistics, the superiority of private company investment returns vis a vis all other investment classes.  And frustrating in that it starkly outlines the very basic mistakes that most private company investors make over and over again that prevent them from being a successful investor in this asset class.

My overall takeaway: If you want to invest in private company deals, only do so via one of two avenues: 1) Via a GOOD angel investment group like The Band of Angels or the Tech Coast Angels (if you can get in) or via a managed portfolio approach such as a private equity or venture capital fund targeted toward the space or via a hybrid, operational approach like Growthink.