Friends or Foes: The Interrelationship between Angel and Venture Capital Markets

NBER Working Paper No. 20147

Issued in May 2014

NBER Program(s):Corporate Finance



This paper develops a theory of how angel and venture capital markets interact. Entrepreneurs first receive angel then venture capital funding. The two investor types are 'friends' in that they rely upon each other's investments. However, they are also 'foes', because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We discuss how the model generates alternative testable hypotheses for the recent rise of angel investing.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20147

Published: Hellmann, Thomas & Thiele, Veikko, 2015. "Friends or foes? The interrelationship between angel and venture capital markets," Journal of Financial Economics, Elsevier, vol. 115(3), pages 639-653. citation courtesy of

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