HBS Study: Angel Backed Companies Less Likely to Kick the Bucket

William R. Kerr

Startup businesses need more than just cash in their kitty to achieve success and business longevity, according to a Harvard Business School paper into entrepreneurial funding.

While it is important that seed businesses receive the necessary funding to get their operations up and running, sometimes the psychological support they receive is just as important as the financial leg up.

Only an archangel can make this happen!

Angels vs. VCs and Friends & Family

Where a venture capitalist may swill some cash around in their managed fund and occasionally flick some in the general direction of promising startups, angel investors give new businesses their proverbial set of wings – give yourselves a pat on your cherubic backs for that one!

Angels are oftentimes seen to provide the same type of support that friends and family might.

But just like the merciless honesty we expect to receive from friends and family, angel investors don’t back a venture they don’t believe in – and this point of distinction appears to make all of the difference.

Angel-Backed Companies Less Likely to Kick the Bucket

The Harvard report penned by William R. Kerr, Josh Lerner, and Antoinette Schoar tables evidence that angel-funded firms are less likely to kick the bucket than firms that rely on other forms of initial financing.

This is good news for you angels out there who have invested your hard-earned cash in a venture and look forward to continued pay days!

While venture capitalists might be intent to keep flogging the dead horse that still promises to win a race, angel investors are proven to seek out companies that are committed to the growth of more than just their bank accounts.

According to Kerr, Lerner and Schoar, the improvements that can be seen within businesses funded by sophisticated angel investors can be logged at between 30% and 50% – more than the improvements noted in businesses using other types of initial financing.

Kerr, Lerner and Schoar go on to say that these statistics can be attributed to:

• the use of networking that is initiated by most angel investors;
• the dedicated due diligence they put into researching each new venture before signing on the dotted line;
• the personal assessment undertaken to weigh up the chances of recovering their outgoings; and
• the way that angel firms survive and thrive by upping the ante on diversifying their portfolio and maintaining a personalised approach to their business backing.

It is okay to initiate a “Give me an A, N, G, E, L” cheer here punters!

More Than Money

The concept comes back to the nature vs. nurture school of thought.

Josh Lerner

Does a new baby require only milk to satisfy her growth and development needs?

Unlikely.

Just like an infant, startup businesses are usually seeking added value from an angel financier.

Adding value means helping out and being there when the
company needs you (e.g. providing helpful advice and critical connections), not stepping on the founder’s toes when your help isn’t needed.

The overall vibe of the Kerr, Lerner and Schoar report is that angel investors should embrace the fact that they are expected to give more to their investments than just the funds.

Take Away

You’re all acutely aware of the fact that the success of your investments is balanced greatly on the success of those you invest in, so take away some key points of thought from the Kerr, Lerner and Schoar paper.

• Due diligence, due diligence, due diligence – Look beyond the business plan and executive summary. Intensively evaluate every member on the startup team. Listen carefully as they present their ideas to you. Do they believe in themselves as much as they expect you to?
• Document, document, document – The Kerr, Lerner and Schoar report details information about how much effort Tech Coast Angels put into maintaining their database of companies not funded by them, but should be! Food for thought…
• Score it – Take a ballot on a new venture detailing your interest level in a pitch delivered by a startup, your overall confidence in the facts and figures that back them up, and your belief in their commitment to drop their egos and put in the hard yards to make success happen.