A new Harvard research examines whether angel investors improve the outcomes and performance of the start-ups they invest in.
It’s probably fair to say that there has never been a better time than today for start-up activity. Apart from traditional funding sources, equity financing provided by market players such as angel investors has quickly gained ground. According to a recent working paper authored by business scholars and published by Harvard Business School, angel investors may actually improve the results and performance of the companies in which they invest.
In the December 2015 paper, The Globalization of Angel Investments: Evidence across Countries, Josh Lerner, Antoinette Schoar, Stanislav Sokolinski and Karen Wilson of Harvard University, MIT, Harvard University, and the Brussels think tank Bruegel, examined the impact of angel investors on their start-up investment targets.
The researchers examined the records of 13 angel investment groups based in 12 nations in Europe, Asia Pacific, Latin America and North America.
They also looked at applicants for financing transactions from 21 nations, examining both the applicants that were considered and rejected and those that received funding.
Angel investors improve survivability
What they found suggested that angel investors have a more beneficial impact on start-ups than previously understood.
“Start-ups funded by angel investors are 14% to 23% more likely to survive for the next 1.5 to 3 years and grow their employment by 40% relative to non-angel funded start-ups,” the paper reported.
“Angel funding also affects the subsequent likelihood of successful exit, raising it by 10% to 17%,” the scholars added.
The implications of the findings are important for financial markets as well as entrepreneurs. The authors have noted that the past decade has witnessed a rapid expansion and deepening of the types of vehicles that fund start-up firms in the U.S. and worldwide.
“We have seen a growing role of angel groups and other more ‘individualistic’ funding options for start-ups, such as super angels or crowd sourcing platforms,” they noted.
According to the research team, governments are sitting up and taking note of the key role angel investors play in providing early access to funding for start-ups.
They “are increasingly seeking to encourage angel investment. The hope is to encourage alternative mechanisms for funding new ventures and to improve the ecosystem for entrepreneurs.”
Angel activity growing, a gateway for further investment
The numbers show that angels are indeed flexing their heavenly muscles on the start-up scene. Recent estimates indicate that in the US, and to a growing extent in other countries, angel investment has long outstripped venture capital investment.
Additionally, the scholars projected that the overall size of the US angel investment market grew from 17.6 billion USD in 2009 to 24.1 billion in 2014. In Europe too, capital invested by angel groups was assessed to have almost doubled over the past five years.
This is good news for entrepreneurs looking to finance their initial business ventures. Business first-timers are also likely to be encouraged by the finding that angel funding seems to act as a door opener for firms looking for follow-on investments after seed financing rounds.
So not only do angels provide much-needed entry-level financing to bankroll start-up activities, they also act as an important validation gateway for the additional funding entrepreneurs need to expand their business activities. That sounds as good as a blessing can get.
Lerner, Josh, et al. The Globalization of Angel Investments: Evidence across Countries. National Bureau of Economic Research, 2015.