Working Paper: NBER ID: w20147
Authors: Thomas Hellmann; Veikko Thiele
Abstract: This paper develops a theory of how angel and venture capital markets interact. Entrepreneurs first receive angel then venture capital funding. The two investor types are 'friends' in that they rely upon each other's investments. However, they are also 'foes', because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We discuss how the model generates alternative testable hypotheses for the recent rise of angel investing.
Keywords: Angel investors; Venture capital; Startup funding; Market dynamics
JEL Codes: D53; D83; G24; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| angel investors (G24) | success of startups (M13) |
| success of startups (M13) | deal flow into venture capital market (G24) |
| angel investors (G24) | venture capital market (G24) |
| VCs exert market power over angels (G24) | lower valuations for startups (G24) |
| angel market dynamics (D49) | VC market dynamics (G19) |
| higher search costs for VCs (G24) | decrease competition in angel market (G24) |