Essays on Entrepreneurial Finance




Vo, Dan H.

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In many developed countries angel capital investment is the main source of external financing for high growth early-stage entrepreneurial companies. In spite of its importance, research in the angel capital market is still very limited. This is partly due the fact that data on angel capital investment is rare and unsystematic. This dissertation attempts to learn more about this important but not well-understood angel capital market. In particular, the first essay looks at the relationship between angels and venture capitalists in financing start-up ventures. This essay juxtaposes a complements hypothesis – angel financing is a springboard for venture capital, against a substitutes hypothesis – angels and venture capital are distinct financing methods that ought not to be combined. The result shows that companies that obtain angel financing subsequently obtain less venture capital, and vice versa. On average venture capitalist make larger investments, but this alone cannot explain the substitutes pattern. In addition, this essay reports that companies funded by venture capital perform better than angel backed companies, as measured by successful exits or revenues. Mixing angel and venture capital funding tends to be associated with worse performance. The second essay studies the role of geographic distance between the angel investors and the investee companies on the angel investment performance. This essay conjectures four possible channels that can explain the relationship between distance and the return to angel investment. It shows that distance has a positive relationship with the return to angel investment. Examining the effect of distance across different categories of angel investors, across angel investor’s locations, and across company’s location, this essay finds evidence that this positive relationship is mainly driven by the “objectivity effect”, which suggests that distant investors can evaluate the prospect of a company more objectively than close-by investors, who tend to be more biased in their judgments. The third essay examines why entrepreneurs find it generally hard to find angel investors. This essay modifies the standard search model introduced by Pissarides to explain this phenomenon. In this model, angels hide to force entrepreneurs to engage in a costly search. The result shows that angel investors adopt the hiding strategy to screen out low-productivity entrepreneurs who would otherwise inundate angels. Interestingly, social surplus is often increased when angels hide, though in some circumstances surplus may fall.



Endogeneous Search, Entrepreneurial Finance, Entrepreneurship, Angel Investors, Venture Capital, Return to angel investment