How long before venture capitalists (and angel investors) get liquidity?

English: Jet black angel is a fresh water aqua...

It’s fascinating to be an angel investor, but do most angels actually make positive returns?  And even more important, how long until they get liquidity?

The theoretical returns look extremely attractive; we’ve identified 12 different studies showing annual returns of 18-54%.  But the bad news: according to CB Insights, the average time for VCs to exit via M&A is 5 years, and via IPO is 7 years.  Angels usually invest before VCs, so they should budget for at least 1-2 more additional years before liquidity.

As both an institutional VC and the Founder of an angel group, I meet a lot of aspiring angel investors.  I try my best to discourage them; I always emphasize the risks and downsides of angel investing.  One of the greatest challenges of the asset class is illiquidity.  It’s precisely that illiquidity that allows investors to reap an illiquidity premium and unusually high returns.  I tried to get some solid estimates of the average time to liquidity, and found a widely varying set of data–in the range of 4.8 to 8 years.

In Stephen Morrissette’s paper, “A Profile of Angel Investors,” he writes, “Studies have found that angel investors hold their investments for about five years” and several sources are cited which give holding periods such as 4.8; 5; 5-6; 5-7; 5.1; and 8 years.

A study performed in the UK by Mason and Harrison on 127 angels found that “average holding time for the investments was 4 years”.  A study in the U.S. by Wiltbank found that “successful investments returned 2.9 times cash in an average 5.8 years holding period.”  (Source: “Angel Investing: A Case Study of the Processes, Risk, and Internal Rate of Return” by Geoffroy T. Roach; also see Expected Returns to Stock Investments by Angel Investors in Groups.)

Of course, there’s a very long tail; some of your biggest winners may take 10-20 years to IPO or exit.   You shouldn’t invest any money as an angel that you’re not comfortable losing entirely, or in the better case, having locked up for 20 years.  At least one angel investment was held for 35 years, according to the “Angel Investor Performance Project” by Wiltbank and Boeker, a report using data containing “survey responses from 86 angel groups totaling 539 investors who had made 3,097 investments.”

If you want to shorten your time to exit, you might consider investing outside of the US market.  According to Dow Jones VentureSource, at the close of the third quarter of 2014, German and Israeli companies that exited each took on average under 4 years from first round of funding to acquisition.  Of course, both of those startup ecosystems are sometimes criticized for encouraging founders to exit early rather than build their companies to full potential.

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For counsel on how to manage companies to earlier liquidity events, I suggest Basil Peters’ helpful book, Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists); more info at Strategic Exits Partners.

In general, I do not recommend you become an angel investor unless you have a lot of liquidity, time, relevant skills, spousal support, and most of all, patience.

(Cross-posted in PEHub. Photo: Jet black angel, a fresh water aquarium fish and multi-layered pun, from Wikipedia)

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