Because of the economic realities of angel investing, not greed.
The hard and unforgiving facts are that the majority of all angel-backed ventures fail completely, losing all the money of all the investors. Of the remaining investments, most will return either the same amount that was originally invested, or perhaps be a moderate success and return two or three times the investment.
The problem is that since the average holding period for an angel investment is around nine years, that means by the time you’ve toted up the returns for 90% of your investments, and subtracted out the time value of money, the one verysuccessful investment in the entire portfolio must return at least *30* times the original investment!
And even with those metrics, and assuming an optimistic holding period of only sixyears instead of nine, the net annual return on all of the investor’s angel activity will be 25%…a pretty limited compensation for taking the enormous risks, active involvement and lengthy period of illiquidity involved.
But assuming we are willing to live with the 25% return, and [obviously] can’t tellwhich of the ten investments is going to be that one “home run”, at the time we make the investment we have to do our best to ensure that ALL of the companies we invest are at least theoretically capable of being a 30x hit.
Therefore, if the maximum market cap we can hope for from a company is $2 million at the end of the day, and our investment needs to return 30x, that means the post-money valuation after our investment needs to be $2m ÷ 30, or $66,666.
If you were therefore looking for an angel investment of $50,000 to fund your company, for example, subtracting that from the $66,666 post-money valuation means that the investor would have to value your startup at $16,666, and would therefore need to own 75% of the company before you got started.
The harsh realities of economics and business turn out to have very, very little to do with greed and evil, and much more to do with Adam Smith’s Invisible Hand.
*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *