Super Angels and Seed Funds: Sim Simeonov’s Advice for Investors and Entrepreneurs

7/7/10Follow @gthuang

Angel investors have good reasons for passing on your startup company. But they should make more, not fewer investments over the long run, in order to maximize their returns. That’s what I took away from Sim Simeonov’s guest analysis in PE Hub last week. But it turns out there’s much more to the story.

Simeonov, a noted entrepreneur, angel, and former venture capitalist, cited a study of angel investing performance conducted by the Kauffman Foundation. Restricting the data set to first-round investments in early-stage tech companies—56 angels with exits from 112 companies—he concluded that two-thirds of the angels made less than what they invested; nearly half generated no return; and 6 percent of the angels accounted for 68 percent of the total returns. (Wade reported on some of this at the Angel Boot Camp last month.)

Intrigued by these results, Simeonov decided to push it further. Being a technical guy—computer scientist, Macromedia and Allaire veteran, former technology partner at Polaris Venture Partners, and founder of FastIgnite—he programmed a “Monte Carlo” computer simulation of angel investing, making some assumptions about the statistics of portfolio companies (based on the above 112 companies). Then he ran the simulation to calculate the hypothetical returns, varying things like the number of companies in an investor’s portfolio.

He found that median returns increased substantially with portfolio size—the more companies, the better you do. The exact numbers aren’t as important (it’s a simulation, not real data), but Simeonov wrote, “Playing like a super angel or an active seed fund as opposed to dabbling with the occasional angel investment is a key strategy to consider if financial returns are important. The data also call into question the behavior of some angel groups that do just a few investments per year.”

I connected with Simeonov over e-mail this week, and asked him a few follow-up questions about his analysis, his advice to entrepreneurs and angels, and how he thinks the early-stage funding environment will play out for tech startups. Here’s the transcript of our Q&A:

Xconomy: What was the most surprising finding from your angel portfolio simulation, and why?

Sim Simeonov: The most surprising finding was not the fact that there is a portfolio effect (expected returns increase with larger portfolio sizes), but the magnitude of the portfolio effect. For example, the fact that the median expected return increases by more than 50 percent between portfolios of 5 vs. 10 companies, and by more than 100 percent between 5 vs. 20 company portfolios. Or that the probability of making a cash-on-cash return of over 2x (getting more than 100 percent over what an angel invests in companies in aggregate) goes up by more than 50 percent when a portfolio … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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