Investing in either startup or small businesses is inherently risky, and you should never invest more than you can afford to lose. That being said, carefully selecting a diverse portfolio can generate significant returns.
Although limited empirical evidence exists relating to returns from seed and angel investing, the NESTA Siding with Angels (2009) report offers a perspective of historical returns, with 1,080 angel investments analysed between 1998 and 2008 generating an IRR of 22%, outstripping the gains available from many other financial investments.
If a business you invest in is successful, it is likely that the return will have been realised via:
- A flotation / public offering, whereby the company has grown to a scale where they could list on a public exchang
- A trade sale, where all or part of a business is acquired by another player in the same industry
- A sale to a financial backer, where the business is sold to a venture capital or private equity firm to take the company to the next stage of development
- Through dividends, where investors share in profits while retaining their equity ownership