The Value of Early Stage Angel Investors

A well-reported story in 2010 was the value of angel investors to early involvement in startup companies. William Kerr and Josh Lerner of Harvard, and Antoinette Schoar of MIT, co-authored a report funded by the Kauffman Foundation about the influence of angel investors. According to their analysis, angels add noticeable value to startups.

Prior to the study, many institutional venture capital firms stated that angels handicapped new companies. This belief was based upon an expectation of disagreement about equity dilution in subsequent financing rounds. Normally, the larger institutions are called upon to fund early stage growth after the angels supply developmental seed money.

The Kauffman Foundation study examined hundreds of deals presented for two major angel investor groups in different geographical regions. The authors compared the results of companies who barely failed to garner enough votes for financing from the angel groups and companies that barely succeeded in obtaining votes for funding. This sampling eliminated comparison of companies that received overwhelming acceptance and obvious elimination in angel voting. Such comparisons would naturally have the influence of other strengths and weaknesses among the companies. The Kauffman Foundation study therefore tends to isolate the effects of the angel financing itself.

The study concludes that angel funded startups were 27 percent more likely to survive for at least four years—which is the length of the study. Most significantly, the study refutes the traditional VC claim that angel investment repels future venture capital. The companies with angel financing closed on average 3.8 times more follow up funding rounds than the startups without angels.

The study of course focused on large angel groups. These investors are experienced entrepreneurs who can provide both capital and professional expertise. Placement of managerial ability is a traditional component of VC firms. Therefore, venture capital firms are moving to enter more seed money stage arrangements in addition to future funding rounds.

Meanwhile, the angel investors still hold the upper hand in launching new ventures. There are about 300 established angel groups in the US, each comprised of about 42 members. These associations of investors permit financing of larger deals together than a single individual could handle alone.  The typical group investment is about $300,000 per deal. That will certainly give a good start to most new enterprises.

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