Clearly, the investment performance of business angels has been variable. This raises a number of questions concerning the factors that influence investment performance. This paper is concerned with two specific questions. First, are certain kinds of investors more successful than others? Second, are certain strategies for investing more successful than others?


In order to address these questions the 20 investors who had made exits were classified according to their exit success . This enabled two groups of investors to be identified:

• a successful group, comprising 6 investors, with an average score of 2 or lower (average success score of 1.31)

• an unsuccessful group, comprising 8 investors, with an average score of 4.54

Every exit of the group of successful investors had been profitable. The unsuccessful investors had not made any profitable exits. A further five investors could not be allocated to either group because their exit performance was variable, with both successful and unsuccessful exits, and insufficient information was available on the exit performance of one investor. The following analysis excludes these six investors.


The successful group had made a total of 10 investments (ranging from 1 to 3 exits) whereas the unsuccessful group had made total of 17 exits (ranging from 1 to 6). The median number of exits for each group was the same (1.5) but the mean number of exits was higher for the unsuccessful group (2.1 cf. 1.7).


Clearly, the small number of investors prevents us from reaching definitive conclusions based on rigorous statistical analysis. However, as noted earlier, research on informal venture capital activity frequently confronts the problem of small sample sizes because of the difficulties in identifying business angels, especially in small countries. Nevertheless, in view of the importance of the topic and the total absence of any previous research on business angel exits we believe that the following analysis is not without merit and that the findings can at least be regarded as suggestive.


Personal characteristics

Both successful and unsuccessful investors are of similar ages (average of 54 years old), have had similar levels of education (Masters degree) and have similar educational backgrounds (technical/ commercial). Both groups of investors have also had similar lengths of entrepreneurial career. However, unsuccessful investors have founded more businesses than the successful investors (means of 7.1 and 6.8; medians of 6.8 and 5.5). There are also no differences in sources of wealth, with dividends from, and sale of, their own company being the most common. The only clear difference between the two groups of investors is in terms of their work experience. Successful investors have spent more time working in top management positions in large and medium-sized companies and in middle management positions, whereas unsuccessful investors have spent more time working in top management positions in small companies (Table 5).



Work Experience of Successful and Unsuccessful Investors


unsuccessful investors
  mean number of years median number of years
large company, top management 5.5 2.1 6.5 0
medium-sized company, top management 5.3 0.6 5.0 0
small company, top management 4.2 15.6 3.0 12.0
middle management in any size of company 10.2 3.9 10.0 2.0
professional 3.7 3.4 2.5 0
civil service, top level 0 0 0 0

Motivations for investing

Investors were asked to rate a series of statements on motivations on a five point scale (4 to 0, with 4 = very important reason for investing) according to their importance as a motive for investing. Of the 15 statements, successful and unsuccessful investors diverged on just four (difference of more than 0.5). Successful investors gave higher average scores to two statements: "investing in an interesting company is exciting" (3.0 cf. 2.4) and "I want to use my leisure time in an interesting and beneficial way" (2.8 cf. 1.9) Unsuccessful investors also gave a higher average score to two statements: "I want to take an active role in developing a promising SME" (3.4 cf. 2.7) and "I fulfil my role in society by investing in SMEs" (2.1 cf. 1.3). The tentative conclusion that can be drawn is that successful investors are motivated to a greater extent than unsuccessful investors by the "buzz" that they get from being a business angel whereas altruism is a more important motivational consideration for unsuccessful investors.


Reasons for rejecting an investment opportunity

It might have been anticipated that successful and unsuccessful investors differ in terms of the way in which they evaluate investment opportunities. However, there are no observable differences in the reasons given for saying "no" to an investment opportunity. Issues associated with the management of the company is the key consideration for both groups of investors.


Deal flow and investment activity

Successful investors receive a higher number of investment opportunities per year than unsuccessful investors (Table 6). Successful investors have also made fewer investments than unsuccessful investors and have invested smaller amounts of finance (Table 6). It might be expected that purely on probability grounds, investors who make a larger number of investments will have a lower success rate in terms of the proportion of investments that are successful. Moreover, investors are concerned with the overall success of their portfolios, anticipating that some - perhaps the majority - of their investments will lose money or break even but that they will make their returns on the small proportion of very successful investments. Nevertheless, taking into consideration both the differences in deal flow and the investments made suggests that successful investors have the advantage over unsuccessful investors of having a wider range of opportunities to choose from and are more selective in those businesses in which they invest.



Number Of Investment Opportunities and Number of Investment Made


  successful investors unsuccessful investors
  mean median mean median
number of investment opportunities (per year) 12.2 7.5 8.5 4.0
number of investment made 2.83 2.5 4.5 5.5
amount invested (million FM) 1.45 1.2 5.0 3.75


Sources of information on investment opportunities

Investors were asked to indicate on a four point scale (1 = regularly, 4 = never) the importance of various sources of information on deal flow. The clearest difference between successful and unsuccessful investors was that friends are a much more important source of deal flow for unsuccessful investors (1.6 cf. 2.8). Unsuccessful investors are also more likely to rely on their own active search and contacts from entrepreneurs, whereas successful investors are more likely to use newspaper and magazine articles as a source of information on investment opportunities.



Prior relationship with investee companies

A striking difference between the two groups is that unsuccessful investors are much more likely than successful investors to invest in friends businesses. Six out of eight unsuccessful investors had made investments in friends' businesses compared with only 2 out of the six successful businesses, and two-thirds of investments made unsuccessful investors (24 out of 36) were in friends' businesses compared with just over 10% (2 of 17) of investments by successful investors. Expressed another way, successful investors are much more likely than unsuccessful business angels to make investments in businesses in which they have no friendship connection with the principals.


Post-investment relationship.

If it is accepted that business angels can add value to their investments through their hands on involvement (and the extent to which this occurs remains unclear: see Mason and Lumme, 1995, for a review) then it might be expected that successful business angels will have greater involvement with their investee businesses. However, there were no differences between successful and unsuccessful investors in terms of the roles that they typically play in their investee businesses (usually board member) nor in the frequency of contact with their investee businesses (usually a few times a month) or the amount of time that they typically spend with their investee businesses (average of 3.5 hours for successful investors and 4.0 hours for unsuccessful investors).


These quantitative measures clearly give no indication of the qualitative contributions made by investors to their investee companies. This issue was explored by asking investors to indicate for a list of 22 areas of potential involvement their own perception of the value of the contributions that they make to their investee companies. Successful and unsuccessful investors diverge in terms of their perception of the value of their contributions in 12 of these areas of involvement. These were primarily strategic management issues. In each case unsuccessful investors had a higher average assessment of the value of their contribution than did successful investors. Examples of such divergences include the following (unsuccessful investor's score first):

• assisting in negotiations (3.3 cf. 1.7)

• introducing new customers and suppliers (3.3 cf. 1.7)

• developing new financing channels (3.1 cf. 1.3)

• assisting in competitor and industry sector analysis (2.9 cf. 1.2)



Given that this difference is the opposite of what would be expected it is not obvious how it can be interpreted. Perhaps the most straightforward interpretation is that unsuccessful investors have an inflated opinion of the value of their hands on contribution, whereas successful investors recognise that the entrepreneur is in the driving seat and hence an external investor's influence is, inevitably, relatively marginal to the success or otherwise of the business. The fact that successful investors rated their impact as lower than that of unsuccessful investors in virtually all of the 22 areas examined (only two minor exceptions) might strengthen this interpretation.



Performance of current investment portfolio.

Past investment success is, of course, not necessarily a guide to future performance and there is no certainty that successful investors will continue to achieve profitable exits in the future. Only four of the six successful investors had current investments. But of these investments, which totalled 13, seven were judged to be performing below expectation, two were thought to be performing as expected and only one was thought to be performing above expectations. Investors said that it was too early to tell how the other three investments were performing. This compares with the unsuccessful investor group who had a total of 17 current investments, of which only six were considered to be performing below expectations and a further six were performing above expectations. This might suggest that the investment performance of investors fluctuates over time, and that the fortunes of the two groups of investors will change in the future. However, an alternative explanation may be that the unsuccessful group of investors have too optimistic a view of the performance of their portfolio.

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Last Updated 4/12/97 by Cheryl Ann Lopez & Dennis Valencia

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