Jeffrey Sohl, director of the University of New Hampshire's Center for Venture Research and professor of entrepreneurship and decisions sciences at the Whittemore School of Business and Economics.
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Angels and Demons: Research shows angel investment may be the best bet
It is what companies in search of investment capital have suspected all along and a new study has finally confirmed: There are distinct and critical philosophical differences between angel investors and venture capitalists, aside from the money sourcing angles.
A new study released by the Center for Venture Research at the University of New Hampshire (U.S) shows there are significant differences in angel investors and venture capitalists in their apporach and management of of initial public offerings (IPOs).
According to the research, venture capitalists are more likely to under price IPO firms and reduce the proceeds to the firm from the offering, while the incentives offered by angel investors are more in tune with non-venture capital pre-IPO shareholders.
This difference in approach and mindset is critical, since under-pricing can generate substantial costs as a company proceeds toward a public offering. In looking at IPOs from 2001-2007, for example, researchers found under-pricing averaged 12.1 percent and the proceeds of the offerings averaged $179.4 million. As a result, the average firm leaves about $21.7 million “on the table,” or 12.1 percent of the offering proceeds,” notes the report.
“If the offering price is low and the closing price is high, this benefits those who plan to hold their shares after the offering, which the venture capitalists do since they do not sell their shares but rather they distribute shares to their limited partners. This allows the venture capitalists to point to a high return to their fund investors (the limited partners) and high returns help venture capitalists as higher returns enhance their reputation to potential future limited partners,” said Jeffrey Sohl, director of the UNH Center for Venture Research and professor of entrepreneurship and decisions sciences at the Whittemore School of Business and Economics.
Conversely, “a high offering price brings more money to the firm and to the angels, the individuals that plan to sell their shares at the IPO.”
The conclusion: Entrepreneurs may be better off avoiding a venture capitalist altogether and going to an angel to obtain their financing.
Companies reviewed as part of the report research included those categorized at the time of IPO as follows:
1. No angel or venture capitalists invested in the firm
2. Only angel investors invested
3. Only venture capitalists invested
4. Both angels and venture capitalists invested
The investment breakdown of the companies reviewed was as follows:
The Center for Venture Research has been conducting research on the angel market since 1980. The center’s mission is to provide an understanding of the angel market and the critical role of angels in the early stage equity financing of high growth entrepreneurial ventures.
UNH researchers also found that IPO firms backed by both angels and venture capitalists are taken public sooner after founding, compared with non-backed firms. At the time of IPO, the age of firms with angel and venture capital backing was 10.9 years and 14.4 years for venture capital-only firms. The age of IPO firms backed with only angel funding averaged 21.4 years and 27.7 years for firms without angel or venture capital.
The researchers also said that angels and venture capitalists may be better at nurturing firms and getting them ready for an IPO sooner, suggesting that angel and venture investors are extremely valuable in the process of assisting a firm in the going-public process.
Finally, angel and venture investors may simply pressure the firm to go public earlier and thus, provide liquidity to their portfolio, which could mean that there is some cost to having these early stage investors, the researchers said.
More information on the study, as well as the Center for Venture Research, is available at http://wsbe.unh.edu/cvr.
- Tim Scannell
