Ramon P. DeGennaro and Gerald P. Dwyer
Working Paper 2010-14
August 2010

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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

The authors thank the Ewing Marion Kauffman Foundation for providing the data and Rob Wiltbank for help in clarifying some of the data's features. The authors are grateful for helpful comments from Stephen M. Miller, Bruce Mizrach, and Paul Thistle as well as from participants in Ewing Marion Kauffman Foundation and Federal Reserve Bank of Cleveland Conferences on Entrepreneurial Finance; the European Financial Management Association's Symposium on Entrepreneurial Finance and Venture Capital Markets; conferences organized by the Association for Private Enterprise Education and the Society for Nonlinear Dynamics and Econometrics; and the College of Charleston and the University of Nevada at Las Vegas. DeGennaro thanks the University of Tennessee College of Business and the university's Scholarly Activities Research Incentive Fund for support. Dwyer thanks the Spanish Ministry of Education and Culture for support of project SEJ2007-67448/ECON. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Please address questions regarding content to Ramon DeGennaro, University of Tennessee, Knoxville, TN 37996, rdegenna@utk.edu, 865-974-1726, 865-974-1716 (fax), or Gerald Dwyer, Federal Reserve Bank of Atlanta and the University of Carlos III, Madrid, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, gerald.p.dwyer@atl.frb.org, 404-498-7095, 404-498-8810 (fax).

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