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The profitability of Finnish business angel investment - By FiBAN

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https://www.fiban.org/news/the-profitability-of-business-angel-investment

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The profitability of Finnish business angel investment - By FiBAN

  1. 1. THE PROFITABLITY OF BUSINESS ANGEL INVESTMENT A new study on the Internal Rate of Return (IRR) analyzing 126 business angel exits in Finland
  2. 2. Content 1. Definitions (Business Angel, Exit and IRR) 2. Background 3. Research structure 4. Results (Investments, Exit, Profits, and Valuation) 5. Comparison (Finland vs. US & UK) 6. Exit portfolio example – Business angel Riku Asikainen 7. Conclusions and next steps 8. Suggestions how to optimize the profitability of positive startup exits
  3. 3. 1. Definitions Business Angel A private person investing his/her time, networks, and personal wealth in unlisted potential growth companies. Exits A business angel makes most of the profits when selling his/her ownership in the startup company, so called ”exit”. IRR (Internal Rate of Return) IRR is a metric used to measure the profitability of potential investments observing the effect of the whole investment life cycle.
  4. 4. 2. Background FiBAN has together with Ruben Moringin (Åbo Akademi) have made an extensive research about the profitability of startup investing done by Finnish business angels. The questionnaire was answered mainly by active Finnish business angels who make angel investments full-time. The role of exits are significant for full- time angels and most of the profits are made through selling the temporary ownership in a startup. There are two previous studies about the topic: Mason&Harrison, UK (2002) ja Wiltbank, USA (2007).
  5. 5. 3. The Research The questionnaire was sent to the whole FiBAN angel network (582). Angels who had reported exits made in previous questionnaires were separately noted. The respondents were all Finnish, mainly active full- time business angels so the survey results do not represent the less active business angels. The answers were gathered during spring and summer 2017. It is very challenging to gather data about exits as the results are reported voluntarily by individual investors. Questionnaire sent to 582 Reactions 121 Answers 40 Reported exits 126
  6. 6. 4. Results – Profitability (IRR) The overall return multiple 3,75X was significant. 126 exits is the largest study so far made about the angel exits in the Nordics. Overall realization multiple (X total sample) 3,75X Pooled IRR (Total sample since inception) 25%
  7. 7. 4. Results – Investment activity Investors had approximately three exits. Most of the exits were made from startups that had received the investment after year 2000. The average holding period was over five years. Exits per investor (average) 3,13 Average holding period for successful investments 5,55 years (median 4,75) Amount of investments made after year 2000 92% Observation period 30,8 years
  8. 8. 4. Results - Activity The angels work very actively with their portfolio companies (20h median) compare to the median ownership 8,5%. 79% of the investments were done in a syndicate (group investment). Average ownership of portfolio company at exit 15% (median 8,5%) Average amount of due diligence conducted before investing per month 37h (median 20h) Average monthly interaction with the company per month 28h* (median 10h) % of investments made in familiar industries (relevant work experience) 62% % of investments made as syndicates 79% *Observe: holding period 5,5 years* 10 hours *12 months = 660 hours of interaction with the startup (median)
  9. 9. 4. Results – Investments & Profits Investments Total aggregated amount invested 11,4 MEUR Average size of unique investment (sample) 90.000€ (50.000€ mediaani) Share of portfolios resulting in partial loss or total loss 44,44% Profits Total aggregated returned at exit 41 MEUR Average gross amount received at exit 326.000€ 4 500 € median Total aggregated amount of dividends received 1,6MEUR 12.400€ Keskiarvo Share of investments paying dividends 10,32% The typical scale of the investments were 40-120.000€, some of the investments passed half a million euros. The average simple valuation of portfolio company's total equity at successful exits was 10 MEUR (median 2 MEUR)
  10. 10. 4. Results – Exit forms Bankruptcy 37% Trade Sale 26% Sold to VC firm 10% Sold to other shareholders 9% Voluntary Liquidation 7% Sold to other investors 5% Management Buy Outs (MBO) 2% Merger 2% Buyback of shares 1% Initial Public Offering (IPO) 1%
  11. 11. 4. Results – Co-Investments Approximately 80% of the investments were made together with other investors, most of the done in an angel group. Investments with other investors Co-investments with other business angels 47% Co-investment with other business angels and VC firm 21% Co-investments with other investors 10% No syndication 22%
  12. 12. 4. Results – The role of angels in the company A business angel often takes a role in the board of the company. Anels rarely takes an active role in the executive management. Member of the board 34% Chairman of the board 23% Advisors 21% Executive Management 5% None 16%
  13. 13. 5. Comparison The returns of full-time Finnish business angels are in line with international exit results. Finnish angels have a longer holding period, but this is compensated with larger return multiples. UK* USA** Finland Internal rate of Return (IRR) 22 % 27 % 25% Return on Investment (ROI) 2.2X / 4v. 2.6X / 3.5v. 3,75X / 5.5v % of the investments made/ % profits 9 % / 80 % 7 % / 75 % 10% / 72 % Return less than <1X 56% 52% 54% *UK Mason&Harison (2002) ** Wiltbank&Boeker (2007)
  14. 14. 6. Exit Example Business Angel Riku Asikainen Background as an entrepreneur and the sold the company he founded. Currently an active business angel, co-founder of FiBAN of which he was the chairman of the board years 2013 and 2014. Worked as the head coach of accelerator StartupSauna and currently the Vice President of the European Business Angel Network (EBAN). Investment background Investments 42 Startup exits 18 Average X return 7,5 Bankruptcy 7 ( /18) TOP3 best exit returns > 40 X
  15. 15. 7. Conclusions and Future Research The profitability of full-time active Finnish business angels is excellent but it is important to observe that 54% of all the investments fail completely or partly. The exit profitability is excellent for full-time investors. The part-time and hobby investors need to be educated and trained to observe exit strategy. Angel exits are crucial to maintain startup investing interest. The exits included one stock listing and there were no ”unicorn” exits included. It can be concluded that also smaller exits are enough to build a positive startup portfolio. The holding period of the investments are longer in Finland. Research next steps Finland has exceptionally well developed business related data and there are wide amount information available to be linked with angel investing. FiBAN will continue to study angel investing and share relevant data to increase the understanding of early-stage startup investing.
  16. 16. 8. Suggestions how to optimize the profitability of positive startup exits 1. Decentralize investments to several companies and co- invest together with other angel investors 2. Be prepared for a long holding period 3. Evaluate potential exit channels already while making the investment 4. Define yourself a maximum limit for investments 5. Prepare yourself for working hard in the investment portfolio company
  17. 17. Additional information Claes Mikko Nilsen claes.mikko@nordicban.net +358 50 491 3001 Reidar Wasenius reidar.wasenius@fiban.org +358 400 432 100 Ruben Moring rubenmoring@gmail.com +358 50 436 1470 Riku Asikainen riku.asikainen@riq.fi Torsti Tenhunen torsti.tenhunen@fiban.org

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