Self-financed angel investors are often found where venture capitalists fear to tread. They typically provide seed financing to start-ups that is counted in the thousands or tens of thousands instead of the millions VCs have to throw around.
A newly released academic study (52-page Acrobat file) finds angel investors also cut the start-ups they invest in better deals, both in early financing rounds and in cases where the company eventually makes its way to an initial public stock offering.
If our conjecture is correct, then an entrepreneur may be better off avoiding a venture capitalist altogether and going to an angel to obtain their financing.
While venture investors are prone to underprice IPO firms, reducing the
proceeds from the offering, angel investors have incentives more aligned with non-venture capital, pre-IPO shareholders.
The working paper by William Johnson and Jeffrey Sohl of the University of New Hampshire's Center for Venture Research found that a substantial number of initial public offerings have angel investors as their only investors -- 13.4 percent.
The authors of the study also find that firms with at least some angel involvement exit via IPOs earlier than purely venture backed firms. They suggest another factor is at work here -- angels are typically not just wealthy individuals with a passive interest in the companies they invest in but former executives or professionals with an intimate knowledge that can give entrepreneurs a leg up in terms of business experience.