Friends or Foes? The Interrelationship between Angel and Venture Capital Markets
56 Pages Posted: 10 Sep 2013 Last revised: 20 Jun 2014
Date Written: June 19, 2014
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.
Keywords: entrepreneurship, angel investors, venture capital, firm valuation, start-ups, hold-up, search
JEL Classification: D53, D83, G24, G32, L26
Suggested Citation: Suggested Citation