Should Angel-Backed Start-Ups Reject Venture Capital?
Univ. of Wisconsin Legal Studies Research Paper No. 1170
20 Pages Posted: 30 Aug 2011 Last revised: 24 Jun 2013
Date Written: August 29, 2011
The conventional wisdom is that entrepreneurs seek financing for their high-growth, high-risk start-up companies in a particular order. They begin with friends, family, and bootstrapping. Next they turn to angel investors, or accredited investors (and usually ex-entrepreneurs) who invest their own money in multiple, early-stage start-ups. Finally, after angel funds run dry, entrepreneurs seek funding from venture capitalists, whose big dollars and deep connections lead the start-up to an initial public offering or sale to a larger company in the same industry. That conventional wisdom may have been the model for start-up success in the past, but this Essay challenges it for the future. In particular, this Essay argues that some start-ups that attract angel funding should stop there, rejecting proffers of venture capital. It challenges the notion that venture capital is a necessary condition for start-up success, and argues the counterintuitive proposition that venture capital may actually be harmful to entrepreneurs and angel investors in some situations.
Keywords: angel investor, venture capital, start-up, entrepreneurship
JEL Classification: G24, G32, K20, K22, M13
Suggested Citation: Suggested Citation