Source: WSJ, Mar 2011
In a recent study done with a researcher at the Federal Reserve Bank of Atlanta, Ramon DeGennaro, a banking and finance professor at the University of Tennessee-Knoxville, examined roughly 400 completed angel investments that lasted at least a year and found that more than 100 ended with the company going out of business, handing those investors an average annual return of minus-93%.
But the returns can be extraordinary if the ventures succeed. Another 180 investments in Mr. DeGennaro’s study were ultimately bought by other companies, giving their investors average annual returns of 84%.
A rule of thumb: Angel investors should be prepared to have their money tied up for seven to 10 years. And angel investments should make up no more than 5% of a wealthy person’s overall portfolio.
With the federal and state governments looking to spark job growth, angel investors can take advantage of an expanding set of tax breaks on small-business investments. Under a law enacted late last year, investors won’t have to pay any capital-gains tax on certain small-business stock they acquire before the start of next year. The stock must be held for more than five years, among other requirements.
The local groups are key because more than 90% of angel investing is done within half a day’s travel time of the investor’s home, Mr. Sohl says. A list of angel groups by region is available on the Angel Capital Education Foundation’s website, www.angelcapitaleducation.org.