Angels? Sure. VCs? Sure. But Not Both.

This paper’s result makes me think we need to augment the martini model of venture investing with a martini and olive model:

We examine the impact of business angels on 182 Series A financings and subsequent company outcomes. Our studied rounds have a varied mix of business angel and formal venture capital investors (VCs). We find that when only angels participate in a financing round and VCs are absent, control rights are more entrepreneur-friendly, legal expenses are lower, and investors are more geographically proximate to the company. Such angel-backed companies are less likely to fail and are more likely to have a successful liquidity event. We find that companies financed exclusively by VC investors also perform well, particularly when deals are large. Companies financed by both angels and VCs experience inferior outcomes. Our results suggest that entrepreneurs consider business angels to be preferred investors and VCs investing in small deals face adverse selection. For larger deals, where deeper-pocket VC participation is required, these roles reverse and angels face adverse selection when investing alongside powerful VC syndicates. [Emphasis mine]


  1. Martin Haeberli says:

    Of course, Google is perhaps the exception to this inferior-rules theory that proves the rule? As I recall, Andy Bechtosheim wrote the first (angel) check for Google, but later, classic VCs came in, too, and did well.

  2. That’s quite interesting. I guess it has a lot to do with the modus operandi of the groups. Angels (being entrepreneurs themselves) are after the passionate things, and VCs being bankers want returns. It makes sense that there’d be a tug of war eventually :)

  3. Knox Massey says:

    I read this paper a few months ago. It is interesting but can be easily taken out out of context. Most of the investments analyzed are 1996-2003 vintage–with a good portion of them in the boom years of 1997-2001. I suspect that many of the boomtime investments skew the reults quite a bit.
    Also, I suspect that many of the angel + VC investments in these samples were made with the angels having inferior preferences and terms. So, when the investments went flat or delivered less than 100 cents on dollar, the angels were the most impacted.
    Angel groups have learned a great deal since those times and have learned to try work with VC’s on a peer level instead of just pitching money into the deal when they can!