Angel Group Investments Positively Impact Startup Outcomes

Acceleration in angel activity, as described in the most recent Halo Report, is a continuation of a general trend of increased valuations, deal sizes, and activity by angel groups since the start of 2011. Despite this, relatively little attention has been paid to the impacts of these angel groups on the firms in which they invest. Research by Harvard Business School Professors William Kerr and Josh Lerner, alongside MIT Professor Antoinette Schoar, expands on the entrepreneurial finance literature by drawing empirical evidence on the impacts of angel investments. Using a variety of econometric techniques, the authors find consistent evidence that investments by angel groups are associated with improved likelihood of survival for four or more years, higher levels of employment, and more traffic on firm websites. The authors also find limited evidence that financing by angel groups helps firms achieve successful exits and reach high employment levels.

In The Consequences of Entrepreneurial Finance: Evidence from Angel Financings, detailed data on company information, level of angel interest, financing decisions made, and subsequent venture outcomes were used to assess the impacts of two prominent angel investor groups, Tech Coast Angels in Southern California and CommonAngels  in Massachusetts.  Using angel interest as a proxy for firm quality, the authors are able to identify a threshold where a critical mass emerges around a deal. Those firms that fall just above this threshold – those receiving angel financing – can then be compared with those that fall just below – those that do not. The authors find that those firms that exist around the threshold have very similar characteristics, and as a result, the impacts of obtaining angel financing can be viewed somewhat causally. 

The study yields several clear patterns. First, the authors find that, unsurprisingly, the interest levels expressed by angels in deals are a substantial factor in their funding decisions. In other words, firms that are perceived as higher quality are more likely to receive funding. In a comparison of firms that received funding to those that did not, the angel funded firms generally look more successful and were, as of December 2010:

• 20 percent to 25 percent more likely to survive for at least four years;
• 9 percent to 11 percent more likely to undergo a successful exit (IPO or acquisition);
• 16 percent to 19 percent more likely to have either reached a successful exit or grown to 75 employees; and,
• 16 percent to 18 percent more likely to have a granted patent.

Furthermore, funded companies are better financed, employ more people, and receive more web traffic. Funded companies have 16– 20 more employees as of 2010, have a 70 percent higher likelihood of obtaining entrepreneurial finance, and are growing faster as measured through web traffic performance between 2008 and 2010.

The authors conclude by noting the limitations of their data. Both Tech Coast Angels and Common Angels are professionally managed and two of the largest, most well-established angel groups in the country. Given the heterogeneity of angel investors and groups as a whole, the impacts assessed in this study are likely to be on the upper end of the angel population. Future research is needed to quantify the extent to which other angel investors and groups, including those that are lesser developed, are able to assist startups.

Speaking at a webinar for the Angel Capital Association, one of the paper’s principal authors, Josh Lerner, described the findings of this paper as well as a forthcoming analysis that seeks to assess the impacts of 13 international angel groups across 11 countries. Lerner’s presentation describes preliminary findings of this soon-to-be released paper:

• Angel investors have positive impact on the growth and survival of the firms they fund, regardless of other national features;
• Globally, angels matter in the ability for firms to obtain follow-on financing, unlike in the U.S.; and,
• Selection of firms that apply for angel funding varies across countries.