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Business Angel investments - due diligence, successes and failures

The recent NESTA* report on Angel Investing makes fascinating reading. 

The report gives some great insights into the successes and failures of Business Angel investors, and whilst it naturally focuses on ‘early stage’ deals, the principles can be applied to investments and acquisitions at various points of the business cycle.

It is well worth reading the report, but there are some interesting findings I would like to point out now :

  • "Those who perform at least some due diligence, even just 20 hours, experienced fewer failed investments”… ”Even a relatively small amount of due diligence helps avoid failure”.

Where an investor spent over 20 hours on Due Diligence, approximately 17% of those investments yielded a return of over 10 times the initial outlay. This compares favourably to those who spent less than 20 hours on Due Diligence - only 5% achieved that return.

This confirms that relying on a ‘gut feel’ alone, is simply another form of gambling!

  • “Those who invested in opportunities where they have specific industry expertise failed significantly less”. The investor is around twice as likely to achieve a yield of over 10x the initial investment with industry expertise.

This also suggests that existing SME owners can produce strong returns by investing in or acquiring businesses in a similar field.

  • The average Internal Rate of Return is 22% in the Business Angel sector, which compares very favourably with current returns across other asset classes. It is a sector that is very beneficial for the economy, and I recommend that successful entrepreneurs seriously consider looking at this market.

Whist the risks are high, the historic returns seem worthwhile. It also appears to be an enjoyable way to invest.

I think anyone investing in or buying a business should read the NESTA report.

Julian Dobbin is a partner at Mercer & Hole. The views given in this blog are personal to the author.

* NESTA is the National Endowment for Science, Technology and the Arts

 

 

Date: 12th August, 2009
Author: Julian Dobbin

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