Profitable Exits

Now that AIM is over four years old, I am getting asked more and more about exits, particularly about profitable exits.  This is only natural, since profitable exits is why we invest— and they are a whole lot of fun!

Given that I am a finance/numbers guy, I’d like to share my the answer to the question about profitable exits.  But first, we need to review the industry statistics that drive angel investing. These are the same statistics we have been quoting in our new member orientation/Angel Investing 101 seminars since the beginning.

Industry wide, 3 or 4 out of 10 angel investments crash and burn and the angels lose their entire investment. 3 or 4 out of 10 investments break-even and angels make a profit on 3 out of 10 investments. Of the 3 investments that make money, at least one of them is usually a home run.  A home run is where angels get 4-5 times their original investment in 3 years or 8-10 times their money in 5 years.

We also know that the average holding period for profitable angel investments is 4.3 years. For my calculations, I am assuming that 10% of profitable exits occur 3 years after investment, 40% after 4 years, 40% after 5 years and 10% after 6 years. These are just my best guesses and yield an average holding period of 4.5 years.

Now we need to review how many companies we invested in each year. In 2012, we invested in 7 companies; in 2013, we invested in 6 new companies; and in 2014, we invested in 7 new companies. We are on track to invest in 6 new companies this year, giving us 26 portfolio company by the end of 2015. Using all of the above stated assumptions, here is a table that reflects the number of profitable exits we should expect by year if we achieve the industry averages.

                             Projected Profitable Exits

* 7 companies X 30% chance of a profitable exit X 10% chance of an exit in year 3.
So what does this table tell us? We have a small chance for a profitable exit in 2015, but we should experience our first profitable exit in 2016. The number of profitable exits should increase each year until 2018 when we should top out at 2 profitable exits per year.  As long as we keep investing in 6-7 new companies each year, then we should maintain the rate of 2 profitable exits per year beginning in 2018.

Remember, this table only reflects profitable exits. There will be just as many exits where we get some or all of our investment back, but no substantial profit. And finally, please remember that these calculations are based on industry averages. Only time will tell what we actually experience.