Expected Returns to Stock Investments by Angel Investors in Groups

50 Pages Posted: 24 Mar 2009 Last revised: 21 May 2010

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Multiple version iconThere are 3 versions of this paper

Date Written: May 20, 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. Calculations of realized returns are a valuable contribution, but realized returns do not drive investment decisions. Rather, expected 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. Previous research typically has ignored this. Our sample of 588 investments spans the period from 1972 through 2007 and contains 419 exited investments. We conduct extensive tests to explore potential bias in the dataset and conclude that the evidence in favor of bias is tenuous at best. Our results suggest that angel investors in groups earn returns that are similar, at least in broad measure, to the 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 about 3.67 years. Returns have a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns. Our estimate of 70 percent in excess of the riskless rate is reasonable compared to Cochrane’s (2005) estimate of 59 percent per year for venture capital, which tends to invest in safer, later-stage projects. Our results are robust to the inclusion of very short-term projects.

Keywords: Angel Investor, Expected Return, Private Equity

JEL Classification: G24, G20

Suggested Citation

DeGennaro, Ramon P. and Dwyer, Gerald P., Expected Returns to Stock Investments by Angel Investors in Groups (May 20, 2010). Available at SSRN: https://ssrn.com/abstract=1360817 or http://dx.doi.org/10.2139/ssrn.1360817

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

Gerald P. Dwyer

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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