Engaging with Investors Early

Published on September 23, 2021

Bauer Researcher Looks at Angel Investors Engagement in Early-stage Startups

Research from a C. T. Bauer College of Business finance professor sheds light on how individual angel investors engage other investors in early-stage startups. Though critical for launching embryonic businesses, little academic research has been done that examines how angels are able to convince other investors to join in later-stage funding rounds.

Professor Vijay Yerramilli, the John H. Duncan Professor of Finance at Bauer College, co-authored “Seed-Stage Success and Growth of Angel Co-investment Networks,” forthcoming in The Review of Corporate Finance Studies. The paper is co-authored with Professor Yerramilli’s former Ph.D. student at Bauer, Buvaneshwaran Venugopal, who is now an Assistant Professor of Finance at the University of Central Florida.

Empirical research on angels has been lacking because of the scarcity of structured data, said

Yerramilli, who also serves as Faculty Director of the MS in Finance Program at Bauer. The data for this research was hand-collected from CrunchBase (www.crunchbase.com), the largest crowd-sourced database on startups and investors, and AngelList (www.invest.angel.com), the leading online fund-raising platform for startups.

Past research has highlighted that well-networked venture capital (VC) firms secure more diverse and better-performing investment portfolios. “However, we know little about why or how some investors end up becoming central to their networks,” Yerramilli said. “Is network centrality itself determined because of reputation gained from good past performance? This is the question that motivated our study.”

“These questions are particularly relevant in case of the angel investment market because the vast majority of angels are individual investors who are not endowed with many network connections to begin with. In this paper we shed light on the co-investment behavior of angel investors, and examine whether angels are able to expand the quantity, quality, and geographic scope of their network connections following the success of their seed-stage startups. We focus on the reputation gain to individual angel investors who demonstrate successful seed-stage performance, because failure is common and success is rare at the seed stage,” Yerramilli said.

The paper finds that individual angels who demonstrated seed-stage success experienced an increase in the quantity, quality, and geographic and industry spread of their co-investment connections relative to unsuccessful peers, and were rewarded with more deal flow. The results were stronger for less-established angels and for successes that are more reflective of the angel’s ability rather than luck. Success also tended to create additional success, making it more likely that the angel’s other portfolio companies received follow-on financing, especially from VC firms.

Yerramilli’s research interests include corporate finance, financial institutions, entrepreneurial finance, real options and investments, household finance, and mergers and acquisitions. He received his Ph.D. in Finance from the Carlson School of Management at the University of Minnesota in 2005, and joined the Bauer College in 2010.

By Julie Bonnin

Posted Under: Bauer Business Minds

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