Angels and Demons: The Negative Effect of Employees' Angel Investments on Corporate Innovation

Abstract

Does a firm benefit if its employees personally invest in start-ups? To answer this question, we exploit novel data, which link angel investors in the US with their employment history. A firm's economic value of patents decreases by 3% - 5% when its employees personally invest in start-ups. We establish causality with matching and instrumental variable regressions, which rely on quasi-exogenous competition in the early-stage financing market. The negative relationship is stronger for angel investors in innovation-related roles, if the start-ups are more time consuming, and for exploratory patents. Compared to other angel investors, angel investors employed at corporations have a positive impact on future innovation and success of their invested start-ups. Our results indicate that angel investors divert time and effort from their employers to their personal investments. We highlight a trade-off between the benefits of angel investors for start-ups and the costs for their employer.

Keywords: Innovation, Angel Investors, Human Capital, Agency Conflicts, Distraction

JEL Classification: G24, G30, O30, O31, O32