One Factor That Improves Angel Investment Returns By 7x

By A.J. Watson of Fundify, LLC in Austin, TXThe article originally appeared on and provides new analysis on the dataset behind the 2007 study "Returns of Angels in Groups" by Rob Wiltbank. 

At Fundify, we spend a lot of time thinking about and researching what makes a successful angel investor. We find some really interesting data through that process and I’m excited to share it with you. Let’s start with the issue of due diligence.

Spoiler alert: It matters. A lot.

In theory, every one agrees that due diligence matters. In practice, not so much. Some research indicates that a third of angel investments are made after less than 10 hours of due diligence. (The average amount of due diligence seems to be around 20 hours before investing.) How much time do you spend on due diligence? If you are part of the 33% of investors conducting less than 10 hours, you might want to reconsider.

  • Investments made after less than 10 hours of due diligence were 43% more likely to fail than investments made after 10 hours of diligence.
  • At the same time, investments made after 10 or more hours of due diligence were 2.3x more likely to achieve returns greater than 5x compared to investments made after less than 10 hours of diligence.

Here’s a graph for comparison:

By the way, there isn’t any magic in spending 10 hours on research. The number could have been 5 or 15 or 40 hours. In each case, the result is the same: more time spent on due diligence means less losses and more wins.

To prove this, we took the data from a study of hundreds of investors (Angel Investment Performance Project) and split it into quartiles by the number of hours of due diligence conducted. Then we looked at what the expected outcomes were for each quartile. Let me know if you spot a trend:

The trend is striking and the difference between the top and bottom quartiles is impressive. Each increase in time spent on diligence directly correlates with a lower percentage of losses and a higher percentage of wins. Compared to spending five hours on due diligence, spending 40 hours on diligence improves the probability of a big win by more than 3x (8% to 26%). It also decreases the percent of losses by almost 40%. The changes in return percentages also have a dramatic impact on the average multiple of cash on cash return:

(Note on construction of this chart: the number of observations is moderately small for this data set and we removed outlier returns greater than 100x from this specific sample. Had we left them in, returns for “Less than 5 hours” would be skewed upward.)

Put another way, for every dollar invested after less than 5 hours of research, you would received back just $0.80. For every dollar invested after more than 40 hours of research, you would have received $7.10 back.

The bottom line is clear. Investors must spend appropriate time with each investment to make sure they fully understand the business and to make sure they aren’t missing obvious reasons to say no. It’s a simple truth, though not necessarily easy: a disciplined approach to your due diligence process will likely improve expected returns.

A help to investors

At Fundify, we’re convinced that due diligence matters for angel investors. We’re also committed to helping them conduct it. That’s why we createdDeal Summary Services. It’s a way for investors to compress the first three to four hours of diligence into five to ten minutes. Really. If you are an angel investor and interested in the service, you can try it today by signing uphere.