Surely, more experienced angel investors can improve a company’s performance, but what evidence is there to prove this? The role of skills and experience in angel-backed deals is much less researched than the backgrounds of venture capitalists. Veroniek Collewaert and Sophie Manigart looked into it, and here is what they found.
They assumed that the key components of an investor’s decision in whether or not to participate in a deal were experience, education, and the perceived value of an opportunity. Their starting hypothesis was that angel investors with more entrepreneurial and investment decision should be better at understanding strategies, and making the right decision when investing in a company.
On a dataset of 123 Belgian firms, Collewaert and Manigart measured the effects of postsecondary education; business degrees; entrepreneurial experience; number of companies founded; number of angel investments made; years of finance experience; and years of legal experience, on pre-money investor valuation.
Based on the results, it seems that the more companies an entrepreneur has founded, the lower they valued the company, acting more like venture capital investors, or “taking a porfolio approach.” Years of entrepreneurial experience, business, law, and other postsecondary education meant that investors valued companies higher. Finance experience, on the other hand, turned out not to be relevant in determining firm value.
The authors then conclude that contrary to previous findings, it seems that angel investors, unlike venture capital firms, take an altruistic approach. Their contracts are more entrepreneur-friendly; they share more of the risk the founders are carrying.
This may be true, but the study also raises a few questions. Creating entrepreneur-friendly contracts, and sharing some of the responsibility may not be an inherently bad thing. The angel investor, being an experienced entrepreneur, might assume that they too, can bring value to the table and influence the outcomes. They might be betting on themselves, assuming that they will bring enough value to the table through mentoring and strategic guidance that both parties will end up in a better position. They might also be assuming that entrepreneur-friendly contracts make founders perform better on the long run.
More importantly, years of experience, or even companies founded may not be the best measure for human capital in entrepreneurship. They can certainly serve as good proxies, but a more pressing question is: how do entrepreneurs who have founded *successful* companies behave when they invest in a company?
To read the full study on the role of human capital in the valuation of angel-backed companies, please click here.
Contributed by Lili Torok.