Investors set aside worries over the sequestration cuts last week as financial markets caught fire, with the Dow Jones industrial average closing at record highs on consecutive days.
In angel investing, though, the truism remains that “there is no free lunch,” investors and financial professionals said at a Feb. 28 panel discussion, “Angel Investing 101 ”“ Best Practices,” held at the Stamford Innovation Center.
For those willing and able to act as “angels” for budding companies, however, the returns can far exceed those of most any other asset class, said David Teten, partner of ff Venture Capital and chairman of the Harvard Business School (HBS) Alumni Angels of Greater New York, which hosted the event.
“Angel investing is very risky,” Teten said, noting that it wouldn”™t be unheard of for an angel investor to back 20 companies and see no returns. But, he said, it “allows you, as an investor, to get much better returns on average than you”™re likely to get in other asset classes.”
Angel investments are sought by startups after they have exhausted their friends and family but before they seek the backing of venture capital firms.
While venture capital firms generally invest funds on the behalf of institutional investors and other large funds, angel investments are made primarily by individuals, either acting alone or as part of a group, such as HBS Alumni Angels.
In successful angel ventures, it can take investors as many as 10 or 20 years before they see a return on their investments ”” if they see a return at all, Teten said.
But the results speak for themselves, Teten said. He cited a dozen studies of angel investments published from 2002 to 2012 that show the average internal rate of return ranges from 18 percent to 54 percent.
Teten said successful angel investing generally requires a combination of patience, due diligence, a high tolerance for risk, ample funds and a network of fellow investors. While the majority of companies that receive angel funding may never measure up to their initial promise, Teten said the right business formula could lead to the next Google, Facebook or Twitter ”” all of which received angel funding.
Diana Dowling, acting director of the HBS Alumni Angels of Greater New York and a Greenwich resident, said angel investors fill a critical need for startups.
“We will see companies often looking to raise money in the $100,000 to $1 million range,” said Dowling. “Angel groups are often non-institutional. We”™re individuals who come together as a group to share our knowledge and share our business thoughts about how we want to fund startups, and we share all that knowledge and at the end of the day we invest as individuals.”
Peter Propp, vice president and director of marketing for the Stamford Innovation Center, said a strong set of angels “can be a huge advantage” for a startup.
“The people who have the wherewithal to make those investments, the connections they have are often at a very senior level ”¦ it”™s a great way for an investor to put money into an industry in which they have a lot of knowledge and expertise,” Propp said.
While there is not a high number of venture capital firms in the region, Propp said there are numerous individuals looking to invest in startups.
“Because we know it takes quite a lot of effort to create a venture fund out by us, creating a vibrant venture community is ”¦ just a critical strategy for us,” he said.
