Essays on Angel Investors and Early-Stage Startups

This dissertation contains three essays on angel investors and early-stage startups. In the first essay, I show that social connections between angels and entrepreneurs, obtained via schools, past employment and ethnicity, positively influence investment decisions of angels, and the subsequent performance of startups. Social connections, irrespective of the ranking of schools or employers in which they were formed, are crucial for securing early-stage financing, particularly in markets with higher information asymmetry. Connected seed-stage startups are more likely to survive longer, raise more series A funds and attract venture capital investments than their unconnected peers.

In the second essay, we show that syndication is widespread in the angel investment market, even among seed-stage startups. Angels that successfully lead seed-stage startups to the next financing stage experience an increase in the quantity, quality, and geographic spread of their co-investment connections relative to their unsuccessful peers, and are rewarded with more new investment opportunities, both as lead investors and participants. Success begets more success, making it more likely that other seed-stage startups of a successful angel also progress to the next financing stage. Overall, our results highlight that reputation for good performance enhances the network capital of angel investors.

In the third essay, we investigate the board formation decisions of early-stage startup firms and how these decisions relate to future performance. An individual is more likely to be appointed as the first outside director if he/she is a seed-stage investor, shares a past professional connection with the founders, or possesses expertise not possessed by the founders. All else equal, a start-up is more likely to attract future directors and future investors that share a past professional connection with the early-stage director. Overall, start-ups that form early-stage boards raise larger amounts in later-stage rounds, are more likely to attract funding from prominent investors and venture capitalists, and are more likely to exit successfully especially through IPOs. All these effects are stronger if the early-stage director is also a seed-stage investor in the startup, except that investor-directors lower the likelihood of exit through the IPO route.