Buzz Archive:
Of Angel Investors, NPV and IRR

by Peter Economy and Joseph Bartlett, 7/6/2006

Other than "having a high net worth," no one-size-fits-all description of an angel investor exists. The levels of experience and particular interests of angel investors vary widely. However, certain overall classifications (with monikers such as trailblazing angel, retired angel, serial angel) can be useful if you are hoping to match your capital needs with the right kind of investor.

Wondering what kind of angel is right for your kind of investment opportunity? In addition, if you are an investor, what is the best way to determine your investment returns?

So what is $100,000 after taxes a year from now actually worth to you today? How much less would you take today instead of waiting a year to get your $100K? In other words, what is its present value (PV) to you today? The answer depends on estimates of inflation during the next year, how certain you are that you will actually receive $100,000 in a year (in other words, the risk you are taking), and your opportunity costs (in other words, what else you could do with the money if you had it now). Money has a value that changes with time - not surprisingly, that is called the time value of money.

Broadly speaking, this is a fairly common business problem. In fact, these sorts of questions arise anytime that you are making a decision or comparing alternative options that involve costs and/or benefits that stretch over a period of time. A technique called discounted cash flow (DCF) analysis is used to make the rational and quantifiable part of your decision. It takes a number of forms. We will show you two of the more common ones here - net present value (NPV) and internal rate of return (IRR). Whether you are trying to value an investment opportunity, deciding to purchase or lease a new piece of equipment, or evaluating the launch of a new product or marketing campaign, a form of DCF analysis quantifies your options. You are then left only with the qualitative aspects to assess in your decision. This is where the different types of angel investors can be qualitatively plugged into the calculation.

Here is a guide to the many different types of angels and the ways to ascertain their investment returns.