Angel Finance: The Other Venture Capital

Abstract

Angel financing is one of the most common, but least studied methods, to finance new ventures. In this paper, I propose a model to explain angel behavior. I use a unique dataset of angel-backed firms to test the predictions of the model and examine the characteristics of angel financing. Although they are exposed to greater uncertainty by investing earlier in the life of a firm compared to venture capital, angel investors do not rely on traditional control mechanisms such as board control, staging, or contractual provisions to protect against expropriation. Instead, angels reduce expected agency costs by forcing entrepreneurs to hold a larger stake in the firm, thereby aligning the interests of the entrepreneur with the outcome of the firm. In addition, angels use more informal methods such as investing in close geographic proximity and syndicating investments with other angels to mitigate risks.

How much should an investor trust the startup entrepreneur? A network model

“…(p. 976). Wong et al (2009), Sudek (2006) and Prowse (2005) indeed find that trust is an important determinant of investment decisions in business angel finance, whereas Bottazzi et al (2011) show empirically that trust matters even for the provision of venture capital.…”

The Globalization of Angel Investments: Evidence across Countries

“…They fund early-stage entrepreneurs, undertake intensive due diligence of potential investments, and serve as mentors and (sometimes) outside directors for the entrepreneurs (Kaplan and Stromberg, 2003;Wong, Bhatia and Freeman, 2009). But since angels invest their own money, they should be less prone to agency problems that have been documented for VC funds: for instance, fee-based compensation structures can lead to excessive fund raising (Metrick and Yasuda, 2010;Chung, et al, 2012) or sub-optimal investment and exit decisions (Gompers, 1995).…”

Entrepreneurship, Financial, And Economic Development: A Literary Review

“…Business angel as a financing vehicle combines the benefits of solution to the two challenges of early start-ups. Business Angels are the oldest, largest and most often used source of outside funds for entrepreneurial firms and accounting for 50% of PE funding and VC accounting for the balancein North America (Wong, 2010). Kerr, Lerner and Schoar (2010), provide evidence that -Angel-funded start-up companies are less likely to fail than companies that rely on other forms of initial financing.…”

“…Technically, this arrangement cannot satisfy the essence of the financing tool. One of the pungent features of angels is their geographical proximity to the businesses they invest in (Wong, 2010) principally because their mentorship, handholding,learned experience sharing, networking opportunities, marketing support and managerial support roles are key ingredient to the investment and success of the enterprise (Ajagbawa, 2014). The development of angels must therefore be rooted in the local environment to benefit from these non-financial, but critical resources especially for early start ups.…”