Expected Returns to Stock Investments by Angel Investors in Groups

By DeGennaro, Ramon P.; Dwyer, Gerald P. | Federal Reserve Bank of Atlanta, Working Paper Series, August 15, 2010 | Go to article overview

Expected Returns to Stock Investments by Angel Investors in Groups


DeGennaro, Ramon P., Dwyer, Gerald P., Federal Reserve Bank of Atlanta, Working Paper Series


Working Paper 201044 August 2010

Abstract: Angel investors invest billions of dollars in thousands of entrepreneurial projects annually, far more than the number of firms that obtain venture capital. Previous research has calculated realized internal rates of return on angel investments, but empirical estimates of expected returns have not yet been produced. Although calculations of realized returns are a valuable contribution, expected returns, rather than realized returns, drive investment decisions. We use a new data set and statistical framework to produce the first empirical estimates of expected returns on angel investments. We also allow for the time value of money, which previous research has typically ignored. Our sample of 588 investments spans the 1972-2007 period and contains 419 exited investments. We conduct extensive tests to explore potential bias in the data set and conclude that the evidence in favor of bias is tenuous at best. Our results suggest that angel investors in groups can expect to earn returns that are on the order of returns on venture capital investments. Estimated net returns are about 70 percent in excess of the riskless rate per year for an average holding period of 3.67 years. This estimate is reasonable compared to Cochrane's (2005) estimate of 59 percent per year for venture capital investments, which tend to be in lower-variance, later-stage projects. Returns have a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns.

JEL classification: G24, G20

Key words: angel investor, expected return, private equity

Expected Returns to Stock Investments by Angel Investors in Groups

I. Introduction

An angel investor can be defined as a person who provides funds to a private business which does not have publicly traded stock and is owned and is operated by people who are not relatives or friends of the investor. Acting as informal venture capitalists, angels invest billions of dollars in thousands of fledgling companies annually. What returns can these angels expect to receive on their investments? Although previous work has explored realized returns, this paper is the first to obtain estimates of expected returns on angel investments in a form comparable to reported expected returns on stock or venture capital.

Until recently, research on the returns to investments by angel investors and angel groups has been limited because suitably large data sets simply have not been available. For example, Goldfarb, Hoberg, Kirsch and Triantis (2009) have just 32 angel-only investments in their study of private equity, and not all of them are exited investments. The Angel Investor Performance Project recently has produced an informative database on angel investments. In contrast to Goldfarb, Hoberg, Kirsch and Triantis (2009), these data have 588 investments of which 419 are exited investments.

We use these data to explore the expected returns on angel investments. Our paper is similar in spirit to Cochrane (2005), who estimates the returns on venture capital investments, and to Barnhart and Dwyer (2009), who estimate the returns on traded stock in new industries. It differs from Wiltbank (2005) and Wiltbank et al. (2008) because we estimate expected returns rather than realized returns. Thus, our paper combines these strands of the literature by estimating expected returns on angel investments. The distinction between realized internal rates of return and expected returns is critical. Realized internal rates of return do not drive financial decisions. Expected returns drive financial decisions.

II. Prior Literature

Angel investors and their investments are not well documented. This is partly because individual investments tend to be informal, so there is little or no documentation or data. Also, practitioners and academics have not reached a consensus concerning even the definition of an angel investor. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Expected Returns to Stock Investments by Angel Investors in Groups
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.