We all know that the success in angel investing involves many factors. We continue to understand this as we develop more analysis to support this belief. Examples of these factors include valuations, due diligence, building a portfolio of companies, business sectors, angel engagement and others. Several monthly ACA Data Insights have been published on these items and others.
One of the items the Central Texas Angel Network (CTAN) reviewed was angel engagement with start-up companies. CTAN is a large angel network in Austin, Texas formed in 2006. Through 2022 CTAN has invested over $125M in 208 companies. CTAN has no fund, so when an investment is made in a company by a member, his/her individual name or entity is on the cap table. There are many ways angel engagement can occur with an entrepreneur and start-up company. One of the primary ways for angels to engage with entrepreneurs is through a personal relationship as a mentor/advisor which can occur both prior to and after an investment has been made. Individuals serving as an advisor can assist with hiring/recruiting, customer engagement, and product development. These roles are generally unpaid.
Another type of engagement is serving as a Board member or Board observer for a start-up. Start-up boards are generally formed when first outside money is invested in a start-up company. In many cases this outside money is from angel investors. Generally speaking when enough CTAN members invest money in a start-up an initial board is formed. In the case of CTAN, when we lead the due diligence of a company and at least 5 or more members are investing collectively $400,000 or more we require a Board be formed with a Board of Directors. This requirement is specified in the Term Sheet we negotiate with the entrepreneur and it will stipulate that one of the Board members will be a CTAN member. Often times this is a CTAN member who participated in the due diligence and has experience or knowledge of the start-up’s business. This Board member must have the approval of the founder. Usually, Board Members (and observers) are compensated through stock options.
CTAN is a very data-centric angel group and we wanted to look at our portfolio performance to determine if Board service by a CTAN member was making a difference. Of the 208 companies in which CTAN members have invested, a total of 64 have shut down or gone out of business, 51 companies have provided members with an exit, and 93 companies are still in business. We decided to look at the 51 companies that provided members with an exit. Shown below is a chart which measures the return multiple and internal rate of return for exited companies. Of the 51 exited companies 33, or 65% had a CTAN Board member and 18, or 35% did not have a CTAN member serve on the Board:
FIGURE 1: ENGAGEMENT DRIVES RETURNS