What are Lateral Capital’s Return Objectives?

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Our return objective is to deliver the “research average” for Angel investments on a continuing, sustainable basis. Based on a 2007 study of 450 companies (Wiltbank, Ph.D., Robert and Boeker, Ph.D., Warren, “Returns to Angels in Groups,” 2007), we target a gross return of 2.6X invested capital, with an imputed Internal Rate of Return of about 15-20%.

Importantly, this most recent research is the first in a series of studies, covering almost 1,000 Early Stage companies since 1997 – in the U.S. and the U.K. As shown below, the results are very similar across economic cycles:

 

“The consistent pattern of outcomes across multiple studies (which cover different time frames, economic cycles, geographies, and units of analysis) increases our confidence that these results are representative of outcomes to the U.S. group Angel investing.”

Rob Wiltbank
University of Willamette

The most recent 2016 study research, which included the Great Recession period of 2009 to 2011, is perhaps most remarkable. Without follow-on capital, 70% of companies went out of business versus an average of 54% of companies in the two previous studies. Still, the companies producing a 10X return or more were sufficiently successful to keep the average return at about 2.5X. A key to Lateral Capital success – actual and projected – has been our ability to have fewer “failed companies” than the industry typically experiences. As any investor will tell you, having “zeros” in your return average returns makes it very difficult to achieve target returns.

Stepping back, the key thing Early Stage investors have to remember is that Early Stage is an asset class, not a “one-at-a-time” business. Here is our perspective in a nutshell:

With 7-10% of Early Stage investments providing 80-90%
of total returns, diversification is essential. If investors
are not planning to invest in at least 10-15 companies,
they shouldn’t start.

The 2007 Willamette analysis of 450 companies projected an average return of 2.6X.
A similar study was done for NESTA in Britain in 2009, showing that 240 Early Stage investments produced 2.2X invested capital.
The 2016 Willamette/Angel Research Institute analysis of 245 companies projected a 2.5X average return.