Angel Investors Around the World

Angel investors have a long history as informal investors within the narrow subset of the private equity (PE) market. The first ‘angel investors’ were wealthy individuals who funded expensive Broadway productions, and this term was later used by William Wetzel to describe investors who fund entrepreneurs. Angels usually are found among the friends and family members of entrepreneurs. Their financial support can consist of a one-time injection or can be ongoing over a start-up’s lifecycle. In addition to financial support, angels often provide managerial assistance and coaching and they prefer to invest in local firms, and in general do not use conventional control mechanisms, such as entering contracts, sitting on boards, or staging financing, and they hold smaller positions in investee firms than venture capital (VC) fund investors.

Angels are playing an increasingly important role in funding entrepreneurs at the seed and early stages, and indeed their importance in the entrepreneurial economy has been recognized even more in recent years and many researchers have found angels’ importance to the start-ups to be equal to that of VCs, with the total angel market being approximately the same size as the VC one.

We may already know the above characteristics, features and importance of angels. However, there are few studies that consider at the level of the individual investor the relationship between the organization and its environment which our study attempts to address by examining the contexts that favor individual investors over PE and VC investors.

To better understand such a relationship and shed more light on the angel investing activities, in our recent paper, Angel Investors Around the World, forthcoming in the Journal of International Business Studies, we seek to explore and answer the following questions:

1. How does angel investment differ from PE and VC investment around the world?

2. How is angel investment affected by the legal and cultural environment?

In answering those questions, our analysis exploits the comprehensive data collected at the deal level of investee firms from PitchBook, which describes 85,940 completed deals in 96 countries from 1977 to 2012. Among those deals, 5,397 from 42 countries involve angels (either as single funders or as participants in co-invested or syndicated PE and VC funds). Our study is the first to use a multi-country PE deal-level database to contrast the investments of angels and those of PE and VC investors.

The data indicate that, relative to PE and VC funds, angels invest in smaller, more active entrepreneurial firms that tend to be located in countries characterized by less effective legal environments and higher levels of individualism and risk-taking. The data also show that, relative to firms funded by PE and VC funds, those funded by angels have a lower probability of successful exits, through either an initial public offering (IPO) or an acquisition, although the difference is smaller in countries with a more effective legal environment, especially for IPO exits. Moreover, we find no evidence in our subsample tests that angels provide a “stepping stone” to investee firms as some have suggested, but rather that a firm that receives angel investment in the first round has a lower probability of successfully exiting in later stages.

In our extended version of this study posted on SSRN, we further performed difference-in-differences tests to specifically assess the effects from regulatory changes in specific countries that are associated with more stringent disclosure rules and more forgiving bankruptcy law changes on angel activities. Our analysis has shown that subsequent entrepreneurial spawning activities induced by angels, PE and VC funds are more pronounced for countries with more stringent disclosure regulation changes and more forgiving bankruptcy law changes.

Our study provides new evidence that legal, economic, and cultural conditions determine whether a firm will be funded by individuals or by organizations. Although angels are still an under-researched topic, we believe and hope that with more credible data, future researchers will be able to shed even more light on what opportunities angels prefer, how they make investments—both domestically and internationally, where their preferred locations are, how they syndicate or co-invest with other investors, which financial contracts they are likely to use, what the real relationship between entrepreneurs and angels is, and how their heterogeneity impacts their investments.

Douglas Cumming is the DeSantis Distinguished Professor of Finance and Entrepreneurship at Florida Atlantic University College of Business.

Minjie Zhang is an Assistant Professor of Finance at the Odette School of Business, University of Windsor, Canada.