NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consequences of Entrepreneurial Finance

Some of the 'softer' features of entrepreneurial financing, such as angels' mentoring and networks of business contacts, may have helped the new ventures the most.

Angel investment groups are an important and growing source of entrepreneurial finance. These groups – which are typically semi-formal networks of high-net-worth individuals – meet regularly to hear aspiring entrepreneurs pitch their business plans before deciding whether to invest in such ventures. In The Consequences of Entrepreneurial Finance: a Regression Discontinuity Analysis (NBER Working Paper No. 15831) co-authors William Kerr, Josh Lerner, and Antoinette Schoar analyze the role of these "angel" entrepreneurial financiers in the success and growth of new ventures. Their approach also exploits breakpoints in the funding process to separate the role of matching (that is, good entrepreneurs pairing with good investors) from the value provided by the angel investors.

The authors use data from 2001 to 2006 provided by two angel investment groups: Tech Coast Angels of southern California and Boston-based CommonAngels. They first analyze the distribution of over 4,000 ventures that approached these two groups to show the tremendous variation in start-up quality. Over 90 percent of the ventures fail to elicit significant support from the angels, and the probability of receiving funding in this group was basically zero. On the other hand, a small fraction of ventures receive overwhelming support from all of the angels involved.

The authors then focus on 130 ventures that were just around funding thresholds, based upon the interest scores expressed by members. These borderline cases are the most interesting to the authors because the ventures are very comparable on observable quality dimensions at the time of the pitch. Thus, funding is related to idiosyncratic factors more than anything else. Looking forward, though, those ventures that were just above the funding border were 27 percent more likely to survive for at least four years than firms that narrowly missed the threshold for funding. Also, improvements of 30 to 50 percent were evident in venture growth, as measured by web traffic.

On the other hand, the authors find ambiguous results for whether angel financing helps ventures access other forms of entrepreneurial finance, like venture capital. Thus access to additional financing may be a by-product of the angel-led growth process, but may not be generally as important. Kerr, Lerner, and Schoar conclude that some of the "softer" features of entrepreneurial financing, such as angels' mentoring and networks of business contacts, may have helped the new ventures the most.

-- Frank Byrt

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