Abstract
We investigate the impact of the angels’ share—the angel investors’ proportion of ownership—on entrepreneurial performance. We argue that below the blockholder level of ownership, the angels’ share is associated with greater innovation but lower market performance. In contrast, we predict that above the blockholder level of ownership, the angels’ share is associated with lower innovation but higher market performance. We test this proposition across two independent samples of US-based ventures. In study 1, we analyzed data from the Kauffman Firm Survey (KFS, 2004–2011) to substantiate the angels’ share hypothesis. Moreover, we show how angels’ share and family investors interact in new ventures. In study 2, we analyzed data from the Entrepreneurship Database Program (EDP, 2013–2018) to check the robustness of the angels’ share hypothesis. Both studies point to the importance of ownership thresholds in predicting angel investor activism in the strategy of new ventures.
Plain English Summary
We find that when angel investors own a substantial share of a new venture (i.e., blockholder ownership), there is an increased likelihood of angel investor activism and a greater strategic focus on market performance in the new venture. In contrast, when the angels’ share is below the blockholder level, there is a decreased likelihood of angel investor activism and a greater strategic focus on innovation. However, these relationships depend on the presence of family investors. One key implication of this study is that new firms should encourage blockholder angel investors when their primary goal is to increase ventures’ market performance, though this may come at the cost of less innovation. It lends further evidence to the notion that entrepreneurs should carefully consider the composition of their funding sources in formulating their new venture strategies.
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Notes
Our primary interest is to engender a more nuanced understanding of angel investors’ influence on new firm strategy and performance by considering the potential of a nonlinear effect of their shares of the new venture. Though important, we are less interested in systematically comparing them with venture capitalists in terms of these outcomes. Other recent studies (e.g., Dutta and Folta, 2016) have engaged in such systematic comparison between the impact of angels and VCs in new ventures and have generally utilized a binary treatment for conceptualizing and measuring the influence of angels (i.e., angel investors = 1, otherwise 0). Additionally, we focus on angel investors, in general. Some recent accounts have tended to focus exclusively on angel groups, which sometimes bear resemblance to VCs (e.g., Dutta and Folta, 2016; Kerr et al., 2014).
The KFS sample in our first study indicates that angels and family investors can coexist in a new venture, by showing positive and statistically significant relationships between our two measures of angels’ share and family firms (i.e., r = 0.12 and r = 0.05, p < 0.05). Additional evidence that supports that family investors can coexist with angel investors comes from studies that show that family firms are as common as nonfamily firms in the largest, publicly listed firms in the USA (Villalonga and Amit, 2006). This implies that family firms still show potential for exit strategies in the form of initial public offerings.
This represents the angels share: \(\frac{\mathrm{outside equity financing since founding}}{\mathrm{outside equity financing since founding}+\mathrm{ owner equity financing since founding}}\)
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Acknowledgements
We are grateful to Douglas Cumming, Vincenzo Capizzi, and Thelma Obah for helpful feedback on earlier drafts of this paper. In addition, we thank seminar participants at the Emerging Trends in Entrepreneurial Finance Conference, Academy of Management Meeting, and Babson Conference, for insightful discussions on earlier drafts of this paper. Study 1 data included herein are derived from the Kauffman Firm Survey. Study 2 data provided by the Entrepreneurship Database Program at Emory University; supported by the Global Accelerator Learning Initiative. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the Ewing Marion Kauffman Foundation or the Global Accelerator Learning Initiative.
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Uzuegbunam, I., Ofem, B., Fox, J. et al. The angels’ share hypothesis in new firms. Small Bus Econ 61, 843–865 (2023). https://doi.org/10.1007/s11187-022-00695-6
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DOI: https://doi.org/10.1007/s11187-022-00695-6