The research team was comprised of Thomas J. Chemmanur, professor of finance at the Carroll School of Management at Boston College; Harshit Rajaiya, assistant professor of finance at the Tefler School of Management at the University of Ottawa and an alumni of Boston College; and Jiajie Xu, a PhD student in finance at Boston College. The research uses a large sample of financing data primarily from Crunchbase and VentureXpert, as well as datasets from the United States Patent and Trademark Office (USPTO) and the National Establishment Time Series (NETS) database for metrics such as employment and sales.
To address the first research question, angel investors/groups were only included in the sample if they had at least one other investment prior to the investment being analyzed. The purpose of this was to ensure that both the angel and VC investors in the sample were similar in terms of sophistication. The research showed that angel investors that were deemed as sophisticated were less likely to add greater value to a startup than VC investors. Firms with angel financing were also less likely to have successful exits than those with VC financing. "When measured across various industries such as HiTech, manufacturing, and healthcare, this finding remained true," the study found.
To examine if financing from angel investing and venture capital investing are substitutes or complements, the researchers ran a regression to analyze how the participation of angel and VC investors in the first round of financing for a startup affects the participation of these investors in the second round of financing. Therefore, only startups that received at least two rounds of financing are included in this sample – as long as the financing included an angel and/or VC investor.
The results show the share of VC financing in the first round has a strong correlation with VC financing in the second round. This trend is the same for angel financing, where the presence of angel investors in the first round is associated with a higher probability of angel investors being present in the second round. Additionally, the results suggest that the presence of angel financing in the first round is associated with a larger percentage of VC financing in the second round. However, more VC financing in the first round is associated with a small probability of angel investing in the second round.
These results do not provide a clear distinction whether angel and VC investing act as complements or substitutes — they can sometimes act as a complement but sometimes as a substitute. The results, however, do show that the presence of angel investors in the first round is positively associated with VC financing in the second round, while VC financing in the first round is negatively associated with the presence of angel investors in the second round.
For the third question, the researchers measure the success of the startup by analyzing an exit — either via IPOs or acquisitions. Like the previous question, only startups that have received at least two rounds of financing are used in the sample,– as long as there were angel and/or VC investors in those two rounds.
The sample is divided into four groups based on their financing sequence: angel-to-VC, VC-to-angel, VC-to-VC, and angel-to-angel. Startups are divided among these four sequences depending on which type of financing dominated their first and second deal rounds, as long as the dominant type of financing was greater than 50 percent of the total financing in that round.
Firms in the angel-to-VC sequence were 12.3 percent more likely to go public in subsequent years than firms in the angel-to-angel sequence. Additionally, firms in the angel-to-VC and the VC-to-VC sequences were respectively 18.5 percent and 23.9 percent more likely than firms with an angel-to-angel sequence to go public in later years. When measuring for going public, rather than being acquired, these percentages were 28.8 and 23.4, respectively. Firms in the VC-to-angel financing sequence did not have a significant difference in the rate of having a successful exit in subsequent years when compared to firms in the angel-to-angel group.
Relative to companies backed by VC financing, companies with a higher percentage of angel financing had less sales, employment, patents, and exits. Although the researchers control for this by factoring metrics such as company age and sales into their analysis, it is still hard to distinguish these effects based on the deal stage and quality of the company. Startups that need funding but are unable to access it through other means can look to angel investors as a means to further the growth of their company, but there is no clear indication that a startup should specifically pursue financing from angel investors if funding is available – even if the angel investors are considered high-quality and well-known.
The research paper is available for download here.