A New Research Imperative for Startup Finance

july gbanPolicymakers adopted messaging and narratives around the importance of enabling “access to financing” long before the more recent policy efforts to support new firm formation.  However, although the world of early stage capital has been transformed of recent by the introduction of crowdfunding and the merging of traditional types of angel and venture investing, we still know very little about the impact of recent policy interventions and whether they have increased access to financing for promising new ventures.  

We enter an era when strong data collection and analysis will be more vital than ever as we tweak the mix of legislative and regulatory efforts to ensure viable companies don’t fail due to a lack of funding or investor expertise.


In most advanced economies, business angels still represent the primary source of seed and start-up capital for entrepreneurial ventures. Entrepreneurs who require funding for their startup have long relied on angel investors to meet their early-stage funding needs. It is not surprising therefore that public policy has sought to encourage more angel investment.


After friends and family, these self-accredited high net worth investors fill a gap in a startup’s growth path until they qualify for institutional investments, such as venture capital or bank loans. By some estimates, angel investors contribute over $20 billion annually to entrepreneurs in the United States, an amount yet to be matched by crowdfunding, which still represents a relatively small portion of investment despite much media attention. Even angels only cover about 3 percent of funding requests although they provide a disproportionate share of support for startups in the form of expertise, networks, and guidance.

In the United States, there has been some speculation on what the effect of policies to boost crowdfunding will have on business angels, particularly the rules called for by the Jumpstart Our Business Start-ups Act of 2012, commonly known as the JOBS Act. However, there has been no reliable research on this yet. As a less compartmentalized model of startup finance options emerges, reliable research will become much more vital as we assess the impact of recent policy interventions.


For example, currently, angel investors are required to "certify through signature" that their net worth or income qualifies them to become accredited. Some investors fear that new requirements surrounding the new general solicitation rule, which now allows businesses seeking capital to sell ownership stakes online in the form of equity or debt, will increase the burden on experienced angels by leading to additional requirements of bank statements or tax return disclosures.

If you view angels as naturally entrepreneurial and able to quickly adapt to such new requirements, a heavier source of uncertainty is the fact that the SEC has considered increasing the income and net worth requirements necessary to be labeled an accredited investor, which could make up to a quarter of active angel investors ineligible, as reported by Kauffman’s most recent Policy Digest. This represents a far more serious concern.

Common sense suggests that the ideal scenario would allow angels to operate side by side with the new influx of high-risk investors in the early-stage funding pool. Across the world, angels tend to be very active in the high-tech startup sector, and crowdfunding promises to fulfill the funding gap closure in other sectors. In fact, many entrepreneurship researchers consider equity crowdfunding an evolving market in the angel space. Policymakers should be cautious not to discourage mature investors with a lower net worth to exit the community at exactly the time when we need the help from that relatively small pool of experienced investors in mentoring a bigger pool of American risk takers thereby mitigating the risk of consumers' entry into the startup finance market.

Another trend of note for policymakers relates to women. As women entrepreneurs increase their economic impact and become angels, more women-focused angel groups and portals are beginning to sprout. Several initiatives are seeking to boost the scale and momentum of this potential capital pool expansion—it is for example a focus of President Obama’s upcoming Global Entrepreneurship Summit (GES) in Nairobi later this month.

Through increased female angel participation in the funding market, women-owned startups are gaining legitimacy and increasing their chances of fulfilling their growth aspirations. This should be encouraged by any new early stage financing policy.

Of course some in the research community might take issue with my suggestion that there is a paucity of data and analysis around the impact of recent interventions to support Angels. There is indeed some excellent research underway that supports the need for more research and policy efforts to better understand how to advance angel investing.

Two new contributions by Harvard professors William Kerr and Josh Lerner, MIT professor Antoinette Schoar, and their collaborators pairs overseas, Karen Wilson and Stanislav Sokolinsky, show what many see as real evidence that startups backed by strong angels really do better than their counterparts that fail to get such funding.

The first is a study focusing on the United States. By analyzing deals in two angel investment groups, specifically Tech Coast Angels in Southern California and Common Angels in Massachusetts, Lerner and his colleagues determined whether angels make a difference in the companies they fund. They compared deals that just got funded versus deals that just missed getting funds. Marianne Hudson of the Angel Capital Association recently summarized the study’s findings about companies that received funding through the end of 2010 as follows:


  • These companies' probability of survival was 25% higher.
  • Their probability of having an exit was about 11% higher.
  • Their probability of growing to 75 employees was approximately 16% higher.
  • These companies, on average, had 19 more employees than their non-funded counterparts.
  • They had a slightly higher chance of having a patent.
  • They had slightly improved web traffic over their non-funded counterparts.
  • They saw a 39% improvement in their web rank.

The second study assesses whether angel groups outside the United States, such as Italy, had a similar impact, despite the differences in legal frameworks, regulations, tax and other factors in the entrepreneurship environments. This assessment covered 13 international angel groups across 11 countries, and again found a very strong pattern showing that companies that received angel group financing were more likely to survive, have a successful exit, raise subsequent financing, and grow their workforce.


However, we are still lacking solid impact evidence on various policy levers in play. Various forms of public sector incentives (e.g. tax credits and matching funds) and programs to facilitate the deal flow for angels and access to capital for entrepreneurs have been introduced recently in the United States, Turkey and beyond. While these developments are intuitively positive, solid research on the effectiveness of these policy levers does not yet exist (see State of the Field). While by no means can we deduce they are ineffective, the situation is reflective of the paucity of high-quality, publicly available data about angel investing.  

Expanding access to valuable data sources is the only way to gain knowledge about what works and what doesn’t. Recently the Global Business Angels Network was established bringing together the major angel investor networks from across the globe—from North America to Europe, Africa and Australia. Beyond connecting the angel investor networks more effectively with the individuals and organizations improving more broadly the entrepreneurial ecosystems in the 160 nations represented, GBAN hopes to identify strengths and weaknesses in policy frameworks in an effort to guide decision makers in their efforts to increase the number of startup investors in their economies.

Clearly the first conclusion of GBAN should be a simple one. As we reorganize the rules around encouraging, and protecting, our citizens who choose to invest in their nation's risk takers and doers of things, our societies face an equally important imperative to measure our policymaking and interventions. After all, our first rule should always be “do no harm”.


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