A few years ago Mason and Harrison (2002) reported investment outcomes for business angel investors in the UK, one of the very few investigations of performance data for these informal venture capitalists. In answer to the question of "Is it worth it" they raised several concerns about the risk profile of angel investors, where investment failures are the rule rather than the exception. However, their results relative to formal venture capital outcomes (Murray 1999) showed significantly lower proportions of investment failure and comparable "homerun" outcomes. It may well be worth it, but significantly more information is still needed.
The present study furthers efforts to understand informal venture investing in two ways. First, the effects of practices from formal venture capital research in an angel investing setting are identified and explored, e.g. investment stage focus and due diligence. Exploring these factors allows direct consideration of the fit of formal venture capital as a model or guide for angel investors. Second, this study reports results from the first large scale study of angel investor outcomes in the United States.
Comparison of this new information to Mason and Harrison (2002) further triangulates knowledge around this relatively unspecified area of venture investing. Together these address the research questions at hand: How do important factors in formal venture capital investing relate to angel investor performance? and How do the outcomes of angel investors in the U.S. compare to earlier outcome data from informal venture investors in Europe?
Angel investing occurs at the intersection of two interesting areas of study: equity investing and entrepreneurship. While it is a mix of both fields, the current state of the art primarily represents the investing perspective, drawing almost exclusively upon theoretical research into formal venture capital (Prowse 1998). The bulk of formal venture capital research, in turn, is informed by principles from large market practices in capital markets and corporate finance. Primary theoretical frames such as information asymmetry, agency theory, and portfolio concepts are used to explain aspects of formal VC practice and the structure of the VC industry itself (Hellman & Puri, 2002; Lerner, 1995; Sapienza & Gupta 1994). However, in very early stage ventures, where the majority of angel investing takes place, these principles may or may not be driving factors; anticipating agency risks or overcoming contractual hazards due to opportunism, for example, may not be the primary challenge (Kelly & Hay, 2003; Arthurs & Busenitz, 2003).
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Investment Practices and Outcomes of Informal Venture Investors
