eThesis - Kauppakorkeakoulun sähköiset gradut

This thesis responds to the current yet neglected debate of the effects of early stage finance and provides the first-ever study on the realized impact of angel investing on firm performance. In this thesis I study the realized impact of angel groups on firm performance, and analyse the impact over a comprehensive set of outcome metrics relating to firm innovation, commercialization, profitability and productivity. Further, I address the current causality debate of venture capital literature by identifying the source of the angel group impact: is it attributed to pre investment selection abilities or do angel groups casually impact the performance of the firms they invest in? In addition, I decompose the potential angel group effects and, connecting recent startup literature with traditional entrepreneurial finance, examine whether differences in firm stage, business model driver and market readiness affect the magnitude of the realized impact.

The theory for the study is rooted in venture capital (Sahlman 1990) and, in particular, the line of VC realized impact studies (e.g. Croce et al. 2013, Puri and Zarutskie 2012). First, I make a conceptual distinction between potential and realized VC impact. Second, like most sophisticated VC realized impact studies, I perform multiple endogeneity-adjusted fixed effects regressions on a one-to-one matched sample of 75 angel group financed and 75 control firms. Finally, the fixed effects regression results are tested for causality via Wald tests. The robust quantitative methodology and the hand-collected dataset ensure the validity of the results and eliminate common challenges to VC realized impact studies of selection, survey, substitution and survival bias.

The findings of this study confirm angel groups do help 'build' the entrepreneurial 'stairway to heaven' of the firms they invest in, however, under some key constraints. First, angel groups select more innovative firms and contribute to their protection of existing innovation, not the development of new innovation. Second, angel groups accelerate the commercialization of portfolio firms, however, the impact comes with a two-year delay after the investment. After eliminating time effects, angel groups impact significantly the commercialization of only later stage, software-driven and product/market fit firms. The impact on the latter is especially strong.

Third, the results imply a trade-off between the exploitation of existing innovation and the exploration of new innovation: once portfolio firms achieve product/market fit, angel groups shift resources from the creation of new to the commercialization of existing innovation. Fourth, angel groups impact portfolio firm profitability, however, primarily driven by commercialization. Finally, and quite surprisingly, angel groups have a negative impact on firm productivity.

The findings of this study suggest angel groups are only able to eliminate information asymmetries, reduce agency risk and allocate resources efficiently for more mature, quickly scalable and already market ready businesses. Further, the results highlight angel groups ability in scaling proven innovations, not the development of underlying business fundamentals. Overall, the findings of this thesis provide the bedrock for future angel investing realized impact studies, and have important implications for investors, entrepreneurs, angel investor networks, academics and policymakers.