Homophily, Information Asymmetry and Performance in the Angels Market

55 Pages Posted: 8 Jun 2017 Last revised: 2 Oct 2017

See all articles by Buvaneshwaran Venugopal

Buvaneshwaran Venugopal

University of Central Florida - College of Business Administration

Date Written: September 16, 2017

Abstract

Using unique hand-collected data on startups that were seed-funded by individual angel investors, I show that social connections between angels and entrepreneurs, obtained via schools, past employment and ethnicity, positively influence investment decisions of angels, and the subsequent performance of startups. Social connections, irrespective of the ranking of the school or employer they were formed, are crucial for obtaining early-stage startup financing particularly in markets with higher information asymmetry. Connected seed-stage startups are more likely to survive longer, raise more series A funds and are more likely to attract venture capital investments than unconnected startups. The estimates of a two-stage selection correction model show that the higher performance of connected startups is because of post-investment influence of angel investors, via better information exchange and coordination.

Keywords: angel investors, entrepreneurship, homophily, information asymmetry, social networks

JEL Classification: G24, L14, L26, M13

Suggested Citation

Venugopal, Buvaneshwaran, Homophily, Information Asymmetry and Performance in the Angels Market (September 16, 2017). Available at SSRN: https://ssrn.com/abstract=2981033 or http://dx.doi.org/10.2139/ssrn.2981033

Buvaneshwaran Venugopal (Contact Author)

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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