Angel investment returns
Angel investors struggle with normalization of data and “finding unicorns” in connection with picking investments. They generally solve this by way of proxy — tag-teaming with other investors (VCs or Lead Angels) or accelerators. Angel investors also struggle with understanding the performance of their investments, but here they resign to generalizations as few good proxies exist to help. The unfortunate reality is that most investors don't actively track where they have invested money and how their investments pan out. There are at least three contributing reasons:
1. Different platforms
Angel investors hold shares in multiple companies that are acquired through investments across a range of platforms and equity types. Some of the first investments may have been made through platforms like AngelList or Wefunder. Then there is always some odd number of convertible note rounds following on those initial investments. Accelerator Demo Days are a great way to join the local VCs in priced seed rounds. More sophisticated angels have also joined angel networks that help feed deals and protect investor interests long-term. In total, an angel investor may be looking at 20 active equity investments across 3–4 platforms at any given time.
2. Few records
As Henry Ward noted in his recent posting, angel investors rarely get “proof of work.” Out of convenience, it is usually the company’s law firm that holds stock certificates for the investor (which can be problematic since the law firm would represent the company in a shareholder conflict). Investors are also frequently unaware of their percentage ownership and fail to follow up on stock-splits and recapitalizations. By the time there is an exit, the investor simply takes what gets sent to her or him (if anything).
3. Asset allocation
Investments in startups are generally seen as another way to diversify a portfolio beyond public markets. Investors assume that they can look at private investment performance in a similar way to public markets; they simplify their performance analysis by looking at how much money they have invested in aggregate and what they have made in returns. One big exit makes it all worth it.
Few investors dig deep and compare how much money they would have made with a similar investment in an index like S&P 500 (the index has increased 83% over the past 5 years alone) or how their private market strategy is really working.
The search for alpha
Given how hard it is to track investments and evaluate investment strategies with respect to startups, it is not surprising that most angel investors never look closer at what returns their investments have generated. Products like eShares can help investors keep track of their holdings and accountants can help keep track of books and taxes. Yet Excel and a whole lot of time and know-how is required to actually analyze if an investment strategy is working.
Asking hard questions about performance is the first step to becoming a successful investor in startups companies: Which VCs/Lead Angels that I co-invest with add the most value to a company? What sectors are driving performance in my portfolio? How do I identify real alpha opportunities? These are questions we at Bison (www.bison.co) think about every day when we help institutional investors analyze private fund performance. We believe that it is time investors got real returns from startup and other investments in private markets. We are here to make that happen.
