Friends or Foes: The Interrelationship between Angel and Venture Capital Markets
56 Pages Posted: 26 May 2014 Last revised: 30 Sep 2014
Date Written: May 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 discuss how the model generates alternative testable hypotheses for the recent rise of angel investing.
Suggested Citation: Suggested Citation