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The True Value--and A Possible Weakness--of Angel Investors

Most entrepreneurs turn to angels for exactly one reason: they need cash. But a new paper from William Kerr and Josh Lerner of Harvard University, and Antoinette Schoar of Massachusetts Institute of Technology, suggests that although entrepreneurs may be happy to get a cash infusion from angel investors, angels aren't necessarily able to help the entrepreneurs raise more funding down the road.

So-called "angels" are wealthy individuals who invest in promising companies, either alone or alongside other wealthy people. Many angels are former entrepreneurs. Typically, angel investments come after the entrepreneur has exhausted their 'friends and family' money but isn't quite ready to approach venture capitalists or other institutional investors.

Picking Winners

The researchers analyzed data provided to them by two high-profile angel groups, Tech Coast Angels and CommonAngels, from 2001-2006. Both angel groups gave the researchers access to records about the companies that approached them, the level of investor interest within the angel group, the ultimate financing decision, and later outcomes, with the condition that information about individual companies and angel investors remain confidential.

The researchers compared companies who had just managed to get funding with those that just missed it. They were able to do this because each angel group kept records of how many of their members were interested in each deal. By limiting the study to these two groups of companies, the researchers hoped to compare companies that were about equally promising at the time they sought funding.

The researchers followed both sets of companies until 2010. As of that time, the group that got angel funding were:

  • More likely to still be around. Companies that got angel funding were 20 to 25 percent more likely to survive for at least four years
  • More likely to be bought or go public. Companies with angel financing were 9 to 11 percent more likely to have had one of these two forms of successful exits.
  • Bigger. As of December 2010, funded companies had 16 to 20 more employees than those that didn't get angel funding.
  • More likely to have strong intellectual property. Funded companies were 16 to 18 percent more likely to have been granted a patent than their unfunded peers.

The researchers are not sure if getting angel money actually helped entrepreneurs raise more money down the road, however. Angel investors tend to be very well-connected, and the best ones do a great job of mentoring their companies. So you'd think that would lead to success raising more money. But some venture capitalists complain that the terms negotiated by angels with their entrepreneurs make it hard for venture capitalists to then get the terms they'd like.

They researchers also point out that they were not able to study the costs of angel funding. They don't know how much equity each angel group got in exchange for their investment, nor were they able to ask the entrepreneurs for their views on angel funding after the fact.

And it could be, of course, that even within this group of almost-identically-qualified-companies, angels just did a very good job of picking winners.

Would you, or have you ever, invested in a small entrepreneurial venture? What persuaded you?


Image courtesy of flickr user TKTKTK.

Kimberly Weisul is a freelance writer, editor and editorial consultant. Follow her on twitter at

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