Angels and Venture Capitalists: Complementarity Versus Substitution, Financing Sequence, and Relative Value Addition to Entrepreneurial Firms

1 Pages Posted: 11 Jan 2022 Last revised: 19 Jan 2022

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Harshit Rajaiya

University of Ottawa - Telfer School of Management

Jiajie Xu

Boston College - Department of Finance

Date Written: October 21, 2021

Abstract

Using a large sample of angel and venture capital (VC) financing data from the Crunchbase and VentureXpert databases and private firm data from the NETS database, we address three important research questions. First, we analyze the relative extent of value addition by angels versus VCs to startup firms. We show that startups financed by angels rather than VCs are associated with a lower likelihood of successful exit (IPO or acquisition), lower sales and employment growth, lower quantity and quality of innovation, and lower net inflow of high-quality inventors. We disentangle selection and monitoring effects using instrumental variable (IV) and switching regression analyses and show that our baseline results are causal. Second, we investigate the complementarity versus substitution relationship between angel and VC financing. We find that a firm that received a larger fraction of VC or angel financing in the first financing round is likely to receive a larger fraction of the same type of financing in a subsequent round; however, when we include other non-VC financing sources such as accelerators and government grants into the analysis, a firm that received angel (rather than other non-VC) financing in the first round is also more likely to receive VC financing in a subsequent round. Third, we analyze how the financing sequence (order of investments by angels and VCs across rounds) of startup firms is related to their successful exit probability. We find that firms that received primarily VC financing in the first round and continued to receive VC financing in subsequent rounds (VC-VC) or those that received primarily angel financing in the first round and received VC financing in subsequent rounds (Angel-VC) have a higher chance of successful exit compared to those with other financing sequences (VC-Angel or Angel-Angel).

Keywords: Angels; VCs; Successful Exit; Value Addition; Financing Sequence

JEL Classification: G23, L26, O34

Suggested Citation

Chemmanur, Thomas J. and Rajaiya, Harshit and Xu, Jiajie, Angels and Venture Capitalists: Complementarity Versus Substitution, Financing Sequence, and Relative Value Addition to Entrepreneurial Firms (October 21, 2021). Available at SSRN: https://ssrn.com/abstract=3946772 or http://dx.doi.org/10.2139/ssrn.3946772

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Harshit Rajaiya

University of Ottawa - Telfer School of Management ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

Jiajie Xu

Boston College - Department of Finance ( email )

Chestnut Hill, MA 02467
United States

HOME PAGE: http://www.jiajiexu.com/

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