Thoughts on startups by investors that
fund them & entrepreneurs that run them

The reality of returns on angel investment

Editor’s note: This was originally a question and answer on Quora, but the community response was so significant we decided to syndicate it on our Gust blog.

Q: If I want to invest $5,000 as a new angel investor into a new company or companies as part of an angel syndicate, what chances do I have of making a profit in 5 years?

A: “Very, very slim” to “almost negligible” if you’re talking about investing in one startup, increasing to “slim” if the syndicate invests into a dozen or more startups.

I know I’m going to draw the ire of some of the angel crowd, most of the entrepreneurial crowd and all of the crowdfunding crowd with this response, so it’s important to back it up with an explanation, namely:

A majority of all new, angel-backed companies fail completely, so if you invest in only one company, the odds are that you will LOSE ALL YOUR MONEY, not just “not make a profit”.

Several studies and mathematical simulations have shown that it takes investing the same amount of money consistently into at least 20–25 companies before your returns begin to approach the typical return of over 20% for professional, active angel investing. This means the greater the number of companies into which the angel syndicate invests, the greater the likelihood of an overall positive ROI. [1]


  • Angel investing (like venture capital) follows the classic J-curve. Because unsuccessful companies tend to fail early, and big exits from the successful ones tend to take a long time to develop, when you graph it on a timeline, the overall value of an angel portfolio makes a shape like the letter “J.” The value immediately begins dropping for several years as soon as you start investing, and only after a fair amount of time does it change direction and begin to be worth more than the original investment.[2]
  • Since the average holding period for an angel investment in the United States is NINE YEARS, after only five years it is quite likely that the value of the syndicate’s portfolio will still be underwater, unless it just happened to include one unusual, Black Swan, quick home run.


  • A significant part of angel investing is getting access to good deal flow in the first place. The average investment PER ANGEL / PER COMPANY from an angel member of a serious angel group is about $25,000. If you’re only investing $5,000 into the syndicate, and especially if you expect that to cover participation in several deals, the reality is that you would not be considered a significant investor either by potential investees, or even by your fellow investors. And a syndicate made up of even a hundred $5K investors would likely not have the resources to be taken seriously by the ‘best’ companies, thereby relegating it to starting with a second-tier caliber of deal flow.

And finally…

  • Companies always need more money, and therefore provide incentives for their investors to step up and participate in follow-on rounds. These incentives invariably come at the expense of the early investors who choose NOT to participate. This is why venture capitalists always reserve the same amount as their initial investment for them to put in later into the same company. Unless you (or the syndicate) are planning to reserve for follow-ons, your interest is likely to be significantly reduced over time.

I realize that this all sounds very depressing, and makes one wonder why on earth anyone would ever become an angel (good question, actually)! But the answer to that lies precisely in all of the cautions above:

  • IF you are an Accredited Investor, and
  • IF you are prepared to invest at least $50K to $100K per year, and
  • IF you make sure to reserve quite a bit for follow-on financings, and
  • IF you develop a strong deal flow of good companies, either through an angel group or your own contacts, and
  • IF you invest consistently so that you have at least 20 companies (ideally more) in your portfolio, and
  • IF you are professional in both your due diligence investigation and your deal term negotiation (including specifically with regard to valuations), and
  • IF you go in with the knowledge that you are going to be in it for at least a decade, holding completely illiquid assets, and
  • IF you can help add value to your portfolio companies above and beyond simply money (such as board service, contacts, fundraising, etc.)

Then (and only then) will the odds be in your favor for you to join the relatively rarified band of successful, professional angel investors who show average IRRs over their investing years of over 25% per year.
[1] Data Driven Patterns for Successful Angel Investing by Sim Simeonov…

[2] Resource Complementarities, Trade-Offs, and Undercapitalization in Technology-Based Ventures: An Empirical Analysis by David M. Townsend and Lowell W. Busenitz

Written by David S. Rose

user David S. Rose Founder and CEO,

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

prev next

You might also be interested in

The UrbanTech Movement is Transforming Cities

Urbanization is a defining process of modern life.

More than half of the world’s population now lives in cities, and the number of urban citizens around the world is projected to rise to 66% by 2050.

In the US, over 80% of the population lives in urban areas with 1 in 7 Americans living in New York, Los Angeles and

Read more >

Angel Investors Spotlight: An Inside Look at Hudson Valley Startup Fund’s Investment Process & Advice for Founders

Hudson Valley Startup Fund brings together a network of the region’s successful business and community leaders to give back, supporting the launch of the next Hudson Valley visionaries. We sat down with fund managers Chad Gomes, Johnny LeHane and Paul Hakim as they shared insights into their investment process, what they look for in both group members and startups, and

Read more >

The Right Startup Advisors Are As Valuable As Money

If you are a new entrepreneur, or entering a new business area, it’s always worth your time to assemble an Advisory Board of two or three executives who have travelled that road before. You need them before you need funding, and if you select the wrong people, or use them incorrectly, no amount of money will likely save your startup.

Read more >

How do I get in touch with investors/funds with just an idea and no product?

There are many wonderful ideas, and they are not necessarily easy to come up with. So congratulations on having thought of one!


“Having value” and “Being fundable” are two completely different things. What the more experienced responders here are saying is completely accurate: while a good idea is usually a necessary ingredient for the formation of a good company, it is

Read more >

Is there an incubator for aspiring Angel Investors or VCs?

No, but there are several sets of courses on angel investing that can provide a good base from which to start. The most comprehensive and best known is the Power of Angel Investing seminar series developed by the Angel Resource Institute (formerly known as the Angel Capital Education Foundation, and prior to that part of the Angel Capital Association). It

Read more >


2 thoughts on “The reality of returns on angel investment”