Homophily, Information Asymmetry and Performance in the Angels Market
55 Pages Posted: 8 Jun 2017 Last revised: 2 Oct 2017
Date Written: September 16, 2017
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: Suggested Citation