The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis

by William R. Kerr, Josh Lerner & Antoinette Schoar

Overview — What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Key concepts include:

Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group.
Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent.
Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence.
Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most.

Author Abstract

This paper documents the role of angel funding for the growth, survival, and access to follow-on funding of high-growth start-up firms. We use a regression discontinuity approach to control for unobserved heterogeneity between firms that obtain funding and those that do not. This technique exploits that a small change in the collective interest levels of the angels can lead to a discrete change in the probability of funding for otherwise comparable ventures. We first show that angel funding is positively correlated with higher survival, additional fundraising outside the angel group, and faster growth measured through growth in web site traffic. The improvements typically range between 30% and 50%. When using the regression discontinuity approach, we still find a strong, positive effect of angel funding on the survival and growth of ventures, but not on access to additional financing. Overall, the results suggest that the bundle of inputs that angel investors provide have a large and significant impact on the success and survival of start-up ventures. 36 pages.