Why 'Angels' can be the Best Investors for Startups

Last Updated May 27, 2010 12:23 PM EDT

Clarence, the most famous movie angel ever, helped George Bailey save his bank in It's a Wonderful Life. Turns out angels continue to help small-business people to this day.

In a new Harvard Business School working paper with a rather formidable title, The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis, researchers demonstrate that companies that receive angel financing are more likely to survive and thrive than those relying on money from elsewhere.

And the reason is not all about the cash.

Who are these green angels? Most often they are investing groups comprised of high-worth individuals, many who were entrepreneurs themselves. They come together at regular intervals to consider business plans pitched by aspiring entrepreneurs. If they as a group or subgroup decide to back the plan, the angels become very involved with the start-up as advisers, network builders and mentors.

Companies lucky enough to attract angel financiers on average do better than those who use other types of financiers, according to the research by William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT.

  • Angel-funded firms are significantly more likely to survive at least four years and to raise additional financing outside the angel group.
  • Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent.
  • Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence.
And while the money is great, the biggest benefit to entrepreneurs is the sharing of knowledge and wisdom, the researchers say.
"Our results suggest that some of the ofter features, such as their mentoring or business contacts, may help new ventures the most."
Do you have experience with an angel investment group? Perhaps you are an angel yourself. Share your experience with us.

If you are in need of an angel, and aren't we all, the Angel Capital Association Web site is a good place to start.

(Angel image by SunEye, CC 2.0)

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.