Unfortunately, academic research doesn’t provide an answer. No study indicates how much of your company you should give up to obtain angel backing.
A recent Harvard Business School working paper by William Kerr, Josh Lerner and Antoinette Schoar examines whether getting angel funding benefits start-ups. While the study provides suggestive evidence that it does, it can’t rule out the alternative that it doesn’t.
The authors looked at companies that sought funding from two angel groups – Tech Coast Angels and Common Angels – between 2001 and 2006. Focusing on those ventures that just met and just missed the groups’ funding criteria (to avoid having their results being biased by dogs and stars among potential investments), the authors find that getting angel money increases the odds that the ventures survive until 2010, but not the odds that they get additional financing from a source other than the angel group.
(They also show that getting angel money affects subsequent web traffic, but since web traffic isn’t a goal of most entrepreneurs, and no one knows what dimensions of firm performance web traffic is correlated with, I leave this measure aside.)
The authors conclude that “the results of this study... suggest that angel investments improve entrepreneurial success.” Perhaps, but I’m not so sure.
First, getting angel money doesn’t help the startups get subsequent financing, so how does getting angel financing help? The authors say that “’softer’ features, such as their mentoring or business contacts, may help new ventures the most.” Maybe, but there’s no direct evidence that the financed groups received more mentoring or had access to more contacts than those who weren’t funded.
Second, survival is a strange measure of performance for angel backed companies. Few, if any, angels make investments in companies with the hope that they will merely stay in existence. They are hoping that the companies in which they put their money are going to go public or be acquired. The ventures funded by angels might be more likely to survive than those not funded not because they are performing any better, but simply because the angels’ money allows them die slower, increasing their chances of being the “living dead” – companies that aren’t going anywhere but haven’t yet run out of cash and failed.
(If the authors had found that getting angel funding was related to a measure of “successful exit” that combined having an initial public offering with being acquired in a transaction where investors made money, I would be more convinced.)
Third, Tech Coast Angels and Common Angels are among the most successful angel groups, having a relatively high share of positive exits among their portfolio companies. There’s no way to know whether getting money from more average angel groups will increase a new venture’s odds of survival.
In short, while the authors wrote a very interesting academic article, we still don’t know if getting angel money improves the performance of startups.
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Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.