Touched by an Angel? Entrepreneurs Seeking to Obtain Private Equity Financing

(with Tatiana S. Manolova, Linda F. Edelman)


Western New England Law Review


Angel financing is defined as "[i]nformal venture capital-equity investments and non-collateral forms of lending made by private individuals ... using their own money, directly in un quoted companies in which they have no family connection." It "is one of the most common, but least studied methods, to finance new ventures." The National Venture Capital Association assesses it at $100 billion in the United States, while the institutional venture capital market is less than half this size at $48.3 billion. Internationally, as of 2001, the volume of formal venture capital investment was estimated at 0.2% of gross domestic product (GDP), whereas the share of informal investment was on average 1 % of GDP in the thirty-seven countries participating in the Global Entrepreneurship Monitor. Angel financing plays a critical role in the financing of emergent businesses. For growth-oriented new ventures, angel financing fills the critical juncture between informal cash infusions from early enthusiasts such as "friends, fools and family" and later financing from formal institutional investors such as venture capital firms, which, because of their high transaction costs, do not engage in small investments. In addition, business angels usually have entrepreneurial backgrounds and are known to be hands-on investors, contributing their skills, expertise, knowledge, and contacts in a variety of informal and formal roles to their investee businesses. Despite their importance, much of what is known about angel investors is incomplete and not well understood, in part because data are difficult to obtain. Those studies that have looked at the mechanism of angel financing focused mostly on the supply side, using an agency theory or social psychology lens to explore different aspects of the investment process, such as deal generation, screening, valuation, deal structure, monitoring, and exit. Very few studies have looked at the demand side, or the factors that distinguish entrepreneurial firms that receive equity funding from those who do not. Thus, there is a need for research that explores the informal venture capital from an entrepreneur's perspective. The purpose of this exploratory study is to fill this gap by investigating the characteristics of entrepreneurs who seek and secure angel financing. More specifically, we ask two questions: (1) what are the characteristics of entrepreneurial new ventures that seek informal equity financing?; and (2) what are the characteristics of entrepreneurial new ventures that obtain informal equity financing? To address the two research questions, we examined all investment proposals submitted to an angel financing network based in the Northeast over a two-year period. Following the multi-stage selection process implemented by informal equity providers,l1 we focused on the characteristics of the entrepreneur and his new venture that are associated with increased likelihood of being funded. Our preliminary findings indicate that entrepreneurs who seek angel financing tend to be male and well educated, and their new ventures have predominantly business-to-business models that boast a variety of sources of competitive advantage. While the median investment sought is around $1.5 million, angel investors funded new ventures seeking lower amounts of investment, coupled with higher revenue and profit projections. The rest of our paper is organized as follows: after a brief review of the literature on angel financing and the relationship between entrepreneurs seeking informal equity financing and the capital providers, we present our methodology and research design. We next report and discuss our findings. The study concludes with some implications for future research and managerial practice.


Corporate Finance | Entrepreneurial and Small Business Operations

Recommended Citation

Manolova, Tatiana S.,Brush, Candida G.,and Edelman, Linda F. 2009. "Touched By An Angel? Entrepreneurs Seeking to Obtain Private Equity Financing" Western New England Law Review 31, no. 3, Article 9.

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