Like all startups, young tech businesses need to find adequate sources of financing to ensure they can get off the ground. But how can you tell which source of financing best positions your new enterprise for success? Recently published research from the University at Buffalo School of Management suggest that tech entrepreneurs might be better off partnering with venture capitalists than angel investors.
While researchers note that both angels and VCs are important, they found that VC-backed companies enjoyed several advantages. Tech startups backed by VCs were more likely to issue stocks sooner and often found buyers sooner than those backed by angels, according to the research published in the Journal. The difference, researchers posit, is that venture capital comes along with a larger network, giving them a greater reach when looking for additional investors.
"Angels and venture capitalists are both critical to innovation in business," said study co-author Supradeep Dutta, assistant professor of operations management and strategy in the UB School of Management. "But it’s not enough to just get a patent. You need a strong network to shape the impact of the innovation, and venture capitalists have that network."
Dutta attributes the influence of VCs largely to the difference in how money is invested; angels are investing their own capital, he said, whereas VCs are managing a fund capitalized with other investors' money, meaning tighter controls, stricter contracts, and harder deadlines. Because angels are more flexible, they often put less pressure on startups to quickly innovate and grow.
Of course, sometimes an angel's flexibility can be an advantage, Dutta added. While their limited influence means angels can only guide innovation so much, it also helps keep founders happy and willing to experiment, which can sometimes lead to breakthroughs.
"While the stringent control rights that venture capitalists have can move startups toward success, it can also create conflict with founders," Dutta said. "Angels, who are investing their own money, tend to be more flexible and less focused on immediate financial returns, allowing longer-term experimentation."
The results of the research is based on an analysis of 350 investments from angels and venture capitalists. Dutta's fellow researchers are Timothy Folta, professor and Thomas John and Bette Wolff Family Chair of Strategic Entrepreneurship at the University of Connecticut School of Business.
Investors confidence increased in the third quarter of 2016, according to the Silicon Valley Venture Capitalist Confidence Index. The index, which is based on a five point scale, now stands at a 3.88, up from a 3.60 last quarter, indicating that investors are more optimistic and willing to pledge capital to startups. University of San Francisco Professor Mark Cannice attributed the boost in confidence to technological progress and the new opportunities that progress is creating.
"Recognizing major technological shifts that are opening up large new markets for determined entrepreneurs, many of the 32 responding venture capitalists in the Q3 survey focused on the resultant high potential investment opportunities in the future entrepreneurial environment," Cannice said.