Who Finances Disparate Startups?

Abstract

Dozens of mid-sized U.S. cities are fostering startups as regional technology hubs. Using detailed early-stage firm information from Crunchbase, we show such a diminishing industrial agglomeration trend driven by the angel financing. This trend is tied to angel investors’ unique portfolio selection of startups that diverges from venture capitals’ approach. Specifically, angel investors make geographically concentrated investments with industry diversification, while venture capital investors make industry-concentrated investments with relatively greater geographic diversification. We also show that angel investors’ portfolio selection of disparate startups enhances their average portfolio firm performance and plays an important economic role in forming the local entrepreneurial ecosystem.

Keywords: Startup Geographic Location, Startup Business Similarity, Angel Investment, Venture Capital Investment

JEL Classification: G00, L26, M13, L00