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Angel Investors vs. Venture Capital
 Angel investors are every entrepreneur’s dream—affluent
individuals who provide capital for a business start-up,
usually in exchange for convertible debt or an equity stake
in the business. Angels don’t exert as much control over the
developing business; they are less likely to control the
board of directors, have special rights to shut down the
firm, or have liquidation privileges.
Many entrepreneurs would prefer to take capital from
angel investors for just that reason. But if your venture is
large, that may not be an option. And even if it is an
option, your company may have a better chance of long-term
success if you work solely with venture capitalists or angel
investors, not with both, according to new research on early
venture financing by Brent Goldfarb, assistant professor of
management and entrepreneurship, Gerard Hoberg, assistant
professor of finance, David Kirsch, associate professor of
management and entrepreneurship, and Alexander J. Triantis,
professor and department chair of finance.
Very little is known about angel investors—who they are,
what motivates them, and how they invest. Survey evidence
indicates that the private equity investments of business
angels represent the large majority of investments in
startups. Angels typically invest their own funds, unlike
venture capitalists, who manage the pooled money of
others in a professionally-managed
fund. “Does
Angel Participation Matter? An Analysis of Early Venture
Financing,” is the first study of its kind to compare the
impact of angel investors and venture capitalists
side-by-side.
The research examines the role of angel investors in
early venture financing using a new sample of 182 different
Series A preferred stock rounds. It analyzes deals where
angels invest on their own and those where they co-invest
with venture capitalists (VCs), as well as deals in which
only VCs invest.
One result was surprising: “We weren’t expecting to find
the number of mixed deals out there— that is, instances
where angels and venture capitalists were investing side by
side that weren't a result of seed investors still investing
in the next rounds,” says Goldfarb.
When angels invest on their own, they tend to do so in
smaller firms, where the cash flow and control rights tend
to be weaker than in other deals. These firms are just as
likely as VC-backed firms to have successful liquidity and
are more likely to survive, though often in an inactive
state.
When deals are large, VC participation is often an
essential element for raising capital. Ventures that
required an initial investment of more than $3.5 million in
capital were more likely to be successful when VCs were the
sole investors. Ventures which had both angel investment and
VC investment didn’t fare as well—though outcomes were still
good overall, Goldfarb adds.
Some of the deals where angels and VCs invest in tandem
may have the potential to be even more successful with angel
investors alone. Why? Angels may be more likely to give a
venture’s founders greater autonomy. “This is a very good
idea if the founders are skilled entrepreneurs or have
superior industry knowledge than the investor,” says
Goldfarb.
VCs often find it difficult to give founders a great deal
of autonomy because of their fiduciary responsibility to
their limited partners. “Venture capitalists are working
with someone else’s money, which necessitates that they
impose somewhat more draconian terms,” says Kirsch. VCs may
also be less patient with a venture’s early struggles,
because they must cash out of their investments in a few
years and pay back the limited partners.
Unfortunately, angels often don’t have sufficient
liquidity to fund larger deals. When considering smaller
deals, enterprises supported solely by angels have the
lowest incidence of failure, and a similar incidence of IPOs
and acquisitions, when controlling for deal-size, firm age,
cash flow and control rights, among other factors.
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