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How risky is angel investment for the investor?

Although angel investors may not have the same high levels of expectation as venture capitalists, they still expect their investments to be profitable. Angel investment is not a charitable endeavor and angels owe you as an entrepreneur nothing in terms of investment of money or time. That said, the nicest and perhaps most prolific and successful angels don’t do it solely for financial return. They’ve made money and look to angel investing as a way to keep them on top of new innovative companies and as a way to mentor the next generation of big thinking entrepreneurs.

But returns are important because if angels just lost money, at some point, angel investment would stop. Obviously, angel investors, like venture capitalists, often back start-up companies that don’t turn out to be successful, and the investment is often lost.

“If we’re batting .300 (using a baseball metaphor), we’re doing great,” said Owen Davis, managing director of NYC Seed at an Entrepreneur Week panel discussion in April 2010, entitled “Raising Seed-Stage and Angel Investor Capital in Today’s Environment.”

Alluding to risk factor, co-panelist Brian Cohen, vice chairman of NY Angels, quipped: “My wife said why don’t we just burn all the money instead.”

“Without a doubt, angel investing is extremely high risk,” said Robert Wiltbank, a co-author of the 2007 study “Returns of Angel Investors in Groups” and professor of strategic management at Willamette University in Salem, Oregon.

“Even when you’re looking at the outcomes of just the investments that people actually like, you’re still more likely to lose money than to make it. On the flip side, when it works out well it gets fantastic returns.”

And the entrepreneur’s return tends to track the investor’s. “Angels rarely make good returns when entrepreneurs don’t.”

A 2007 study from the Ewing Marion Kauffman Foundation and the Angel Capital Education Foundation found that earliest stage payouts for angels match venture capital results.