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MoreLIP: Angel Support Adds Growth Potential, Says HBS Study

04/11/2010 — George Lipper, Development Capital Networks

Last week’s Harvard Business School Working Knowledge e-mail contained a first look at an upcoming white paper on what appears to be the higher rate of success among companies smart (or lucky) enough to obtain angel investment -- and the support that attends such investments.

If you ran across the white paper's (perhaps tentative) title in your neighborhood library, you’d be excused for not recognizing that the piece -- titled "The Consequence of Entrepreneurial Finance: A Regression Discontinuity Analysis" and authored by William Kerr, Josh Lerner and Antoinette Schoar -- was about the benefits of angel financing.

The paper's abstract notes that "results suggest that the bundle of inputs that angel investors provide have a large and significant impact on the success and survival of startup ventures."

My bias in favor of angel investing would have led me to a similar conclusion without all the work done by Kerr, Lerner and Shoar, but I’m nonetheless pleased to see credit given to angels.

The researchers also got some very high level guidance from some of the nation's most highly regarded and experienced angels, including James Geshwiler of Boston's Common Angels, John May of DC's Dinner Club and Warren Hanselman & Richard Sudek of Tech Coast Angels -- all prominently involved in the formation and launch of the Angel Capital Association (ACA) a decade ago. Without that leadership we'd probably not have angel groups today in so many of the fly-over states, nor the support for angel investing provided by about half the states.

Harvard Business School and Kauffman Foundation also supported the study. The authors, as with all such preliminary publications, are looking for responses to their working paper (10-086), available via weekly HBS release.

One minor observation: As far as I can tell, the paper offers no analysis of the relative value provided by growth-minded entrepreneurs who obtained funding since the industry’s rapid expansion of angel investing, i.e., from those angel groups that became active after the formation of ACA. We knew instinctively that the experienced angel groups’ investments were doing well. We also might find it valuable to get a look at how well the entrepreneurs with new angel money are performing.

Regardless, I find it telling -- following a decade of almost no funding among institutional venture capital -- that the entrepreneurial community in fly-over states is still finding capital from local angel funds.