Angel & VC Investment Returns
I’ve been digging into the math behind the VC or Angel investments. This post is a summary.
Success Measure: IRR Returns
A key measure of success for investors is IRR. So it’s important to first understand IRR and the inputs. IRR is the Internal Rate of Return. IRR in it’s basic form is basically the compound annual growth rate of return that an investment got. The simple inputs are:
- Time (e.g. years)
- Multiple of the amount invested (e.g. 10x back from my $1K investment = $10K)
The below charts show the IRR% based on those two inputs. If one invested 5 years ago and got a 5x return, then the IRR would be 38%.
Target IRRs
Investors are shooting for 20%+ IRRs.
VC IRR Returns vs Other Strategies
Are they getting 20% returns? The below table shows VC returns compared to other investment strategies. What’s interesting here is that on average, the VC investments are not providing better returns than the S&P 500.
… but there’s the story of the Power Law
The below table shows that VC returns are incredibly skewed. The difference between the Top versus Median and Bottom quartiles are very significant. The Top VC Elite firms are offering massive returns.
Angel IRR
Finding information on angel investor returns is difficult. The Halo Report says that IRR is between 22% to 29%. The numbers are a far cry higher than the data shared above. One reason could be that VCs time to exit is longer (. Or could it be that the research methodology here is focused on the Top angel investors? It seems hard for me to believe that all angel investors are getting such massive returns.
I haven’t been able to find any quartile reporting for angel investments, would love to see it if someone has it.
The Decile Elites Need Massive Hits
Let’s assume the top 10% of investors 35% IRR. That’s a 20X multiple….
So Decile Elite fund that has say $100M needs to return $2B in 10 years! And an angel with $2M will want $40M.
A 20x multiple makes a huge impact when selecting companies in a portfolio.
