Angel investors differ from venture capitalists in a number of ways. They tend to work with earlier-stage companies, write smaller checks, and invest only their own money.
Experts also estimate that angel investors in the U.S. fund more than 65,000 businesses each year, while VCs in the country provide capital to just 3,000 companies. However, even though angel investors work with twenty times more businesses than VCs, most people don’t know much about how angel funding affects the companies that receive it.
One of the best pieces of research we have seen on this subject is a 2011 study from a team of researchers at Harvard and MIT. These researchers analyzed data from two large angel investing groups. Using this information, they compared the performance of firms that received angel investments with the performance of those that did not. They found that angel funding improved a company’s performance in three important ways:
- Investees grow larger. Companies that receive angel investment go on to have an average of 16 to 20 more employees than similar firms that do not receive angel funding.
- Investees are more likely to reach an exit. Businesses with angel investors are also 9 to 11 percent more likely to experience an IPO or acquisition.
- Investees show more signs of innovation. Companies that have angel investors are 16 to 18 percent more likely to earn a patent.
To learn more about this study, which was conducted by William R. Kerr, Josh Lerner, and Antoinette Schoar, you can read their full paper here.
Contributed by Coby Joseph.