Friends or Foes: The Interrelationship between Angel and Venture Capital Markets

This paper develops a theory of how angel and venture capital markets interact. Entrepreneurs first receive angel then venture capital funding. The two investor types are ‘friends’ in that they rely upon each other׳s investments. However, they are also ‘foes,’ because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We also examine the role of legal protection for angel investments.

[1]  Alexander J. Triantis,et al.  Are Angels Different? An Analysis of Early Venture Financing , 2013 .

[2]  Karen E. Wilson,et al.  Financing High-Growth Firms: The Role of Angel Investors , 2011 .

[3]  Matt Marx,et al.  Mobility, Skills, and the Michigan Non-Compete Experiment , 2009, Manag. Sci..

[4]  M. Weisbach,et al.  The Financial Structure of Private Equity Funds ” , 2005 .

[5]  Robert J. Robinson,et al.  Angel investing : matching start-up funds with start-up companies : the guide for entrepreneurs, individual investors, and venture capitalists , 2000 .

[6]  O. Sorenson,et al.  Venture Capital, Entrepreneurship, and Economic Growth , 2009, The Review of Economics and Statistics.

[7]  D. Teece.  Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy , 1993 .

[8]  Matthew Rhodes-Kropf,et al.  Innovation and the Financial Guillotine , 2013 .

[9]  Eric Maskin,et al.  Credit and efficiency in centralized and decentralized economies , 1995 .

[10]  Gustavo Manso.  Motivating Innovation , 2010 .

[11]  Dale T. Mortensen,et al.  Job Creation and Job Destruction in the Theory of Unemployment , 1993 .

[12]  Florencio López‐de‐Silanes,et al.  Investor Protection and Corporate Governance , 1999 .

[13]  Per Strömberg,et al.  Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts , 2000 .

[14]  Konstantinos Serfes,et al.  The Market for Venture Capital: Entry, Competition, and the Survival of Start-Up Companies , 2012 .

[15]  R. Green,et al.  Optimal Investment, Growth Options, and Security Returns , 1998 .

[16]  Per Strömberg,et al.  Why are Buyouts Levered: The Financial Structure of Private Equity Funds , 2007 .

[17]  Jim Euchner.  A Cambrian Moment , 2013 .

[18]  S. Shane.  Fool's Gold?: The Truth Behind Angel Investing in America , 2008 .

[19]  C. Pissarides,et al.  Job Matchings with State Employment Agencies and Random Search , 1979 .

[20]  Alexander Galetovic,et al.  Weak property rights and hold-up in R&D , 1998 .

[21]  D. Robinson,et al.  Cyclicality, Performance Measurement, and Cash Flow Liquidity in Private Equity , 2011 .

[22]  Roberta Dessi,et al.  The Impact of Venture Capital on Innovation , 2012 .

[23]  J. Lerner,et al.  NBER WORKING PAPER SERIES THE CONSEQUENCES OF ENTREPRENEURIAL FINANCE: A REGRESSION DISCONTINUITY ANALYSIS , 2011 .

[24]  Liang Peng,et al.  Venture Capital and Sequential Investments , 2009 .

[25]  Jeffrey M. Leavitt.  Burned Angels: The Coming Wave of Minority Shareholder Oppression Claims in Venture Capital Start-up Companies , 2005 .

[26]  Paul A. Gompers,et al.  The venture capital cycle , 1999 .

[27]  Edward J. Egan.  How Start-Up Firms Innovate: Technology Strategy, Commercialization Strategy, and their Relationship , 2013 .

[28]  Thomas F. Hellmann,et al.  Ipos, Acquisitions and the Use of Convertible Securities in Venture Capital , 2006 .

[29]  Peter A. Diamond,et al.  Aggregate Demand Management in Search Equilibrium , 1982, Journal of Political Economy.

[30]  Ramana Nanda,et al.  Entrepreneurship as Experimentation , 2014 .

[31]  Entrepreneurship and the Cost of Experimentation , 2013 .

[32]  Peter A. Diamond,et al.  Money in search equilibrium , 1984 .

[33]  I. Manji.  Fool's gold. , 1996, Journal.

[34]  Manju Puri,et al.  Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence , 2000 .

[35]  Darwin V. Neher.  Staged Financing: An Agency Perspective , 1999 .

[36]  Christopher A. Pissarides,et al.  Equilibrium Unemployment Theory - 2nd Edition , 2000 .

[37]  Ronald J. Gilson,et al.  The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete , 1998 .

[38]  Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance , 2005 .

[39]  C. A. Pissarides,et al.  Equilibrium Unemployment Theory , 1990 .

[40]  Steve Blank.  Why the Lean Start-Up Changes Everything , 2013 .

[41]  Susan L. Cohen.  What Do Accelerators Do? Insights from Incubators and Angels , 2013, Innovations: Technology, Governance, Globalization.

[42]  Anat R. Admati,et al.  Robust Financial Contracting and the Role of Venture Capitalists , 1994 .

[43]  Thomas J. Chemmanur,et al.  Venture Capitalists Versus Angels: The Dynamics of Private Firm Financing Contracts , 2006 .

[44]  Paul A. Gompers,et al.  The Venture Capital Revolution , 2001 .

[45]  J. Gans,et al.  Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction , 1999 .

[46]  Antoinette Schoar,et al.  The Consequences of Entrepreneurial Finance: Evidence from Angel Financings , 2014 .

[47]  Roman Inderst,et al.  The Effect of Capital Market Characteristics on the Value of Start-Up Firms , 2002 .

[48]  A. Silver.  Who's Who in Venture Capital , 1984 .

[49]  Alan Hyde,et al.  SILICON VALLEY'S HIGH-VELOCITY LABOR MARKET , 1998 .

[50]  Thomas Hellmann,et al.  The Circulation of Ideas in Firms and Markets , 2010, Manag. Sci..

[51]  William R. Kerr,et al.  The Consequences of Entrepreneurial Finance , 2014 .