The Profitability of Business Angel Investment

​NordicBAN's angel network member Finnish Business Angel Network - FiBAN has made a new study on the Internal Rate of Return (IRR) of 126 business angel exits in Finland. The IRR results show that the exits made by professional Finnish business angels are very profitable, but the risks are high.

A new study on the profitability of angel investing, made by the Finnish Business Angel Network (FiBAN) is the first broad study on the national angel activity in Finland. The responses consisted mainly business angels who actively invest in startups as their full-time profession. This is the largest study made about the angel exits in the Nordics, and so far, only two similar studies have been made before; United States (Wiltbank, 2007) and the United Kingdom (Mason&Harrison, 2002). Therefore, the new Finnish study is remarkable internationally.

For professional angel investors, the role of exits is vital and maintains interest towards startup investing. The study covered 126 business angel exits measuring the Internal Rate of Return (IRR) that observes the profitability of the whole investment lifecycle. The key results of the study show that the pooled IRR is 25% and overall realization multiple is 3.75. This shows that the IRR of the exits of professional business angels in Finland is excellent and in line with international studies. However, more than a half (54%) of the exits that were reported during the survey were unprofitable. Also these results are in line with the general risk level of the business angels.

​Suggestions how to optimize the prapability of positive startup exits

A business angel can enhance profitability of an exit for example in the following ways:

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

​​Definitions

• Business Angel: A private person investing his/her time, networks, and personal wealth in unlisted potential growth companies.
• Exit: A business angel makes most of the profits when selling his/her ownership in the startup company, so called ”exit”.
• Internal Rate of Return (IRR): IRR is a metric used to measure the profitability of potential investments observing the effect of the whole investment life cycle.

Additional information

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Claes Mikko Nilsen
NordicBAN, Managing Director & FiBAN, co-founder
claes.mikko(at)nordicban.net p. +358 50 491 3001