A conversation with Lang Center PhD Fellow Alessandro Piazza, PhD '18 on his research surrounding angel investing.
What is the main focus of your research?
The focus of my study is the transition from startup founder to angel investor in the high-tech ecosystem. Angel investing is an important topic primarily because it is a very large market — almost as big as venture capital — and worth tens of billions of dollars in the U.S. alone. In addition, recent studies indicate that startups backed by angel investors tend to perform better than those which are not, other things being equal. Because angel investors play such a key role in the development of entrepreneurship — not only in tech, but also more generally — it is crucial to understand what drives individuals to become angel investors.
What motivated you to study this phenomenon?
I became interested in angel investing because of an empirical puzzle of sorts: the popular wisdom in the startup ecosystem seems to be that angel investing is less profitable than venture capital, which in turn is not that profitable, either! And yet, it seems to be overwhelmingly popular — especially among entrepreneurs, given that 88 percent of angel investors have entrepreneurial experience. I decided to go beyond the profit motive to consider the more prosocial reasons that might drive entrepreneurs to become angel investors.
Entrepreneurs are more likely to transition to angel investing when they have received funding from angels in the past.
What are the paper’s key findings?
Leveraging data from Crunchbase, I built a sample of about 20,000 venture-backed entrepreneurs in the high-tech ecosystem across the United States. I complemented this data with LinkedIn information about each entrepreneur’s professional background, career, and education. I then traced all the different types of investments their ventures received; I was especially interested in whether entrepreneurs who received funding from angels would be more likely to become angels themselves.
The data indicated that entrepreneurs are likely motivated by what sociologists call "pay-it-forward reciprocity." As such, I found that entrepreneurs are more likely to transition to angel investing when they have received funding from angels in the past (as opposed to other types of funding like venture capital). I also found that entrepreneurs are more likely to become angel investors if they receive angel funding from people who are similar to them, which is consistent with the sociological notion of homophily, or, the tendency of individuals to form bonds with those similar to themselves.
What do you think is particularly interesting about your findings?
I was most intrigued by the results of pay-it-forward reciprocity, which suggested that each additional angel investment received by an entrepreneur increased the odds of that entrepreneur becoming an angel investor by 15.7 percent.
What else are you interested in exploring in the future?
This study looked at entry into angel investing as a dependent variable. Using the same data, I intend to delve deeper into the investing choices of former entrepreneurs, as well as their outcomes. For instance, are the angel investment patterns of former entrepreneurs qualitatively different from those of non-entrepreneurs? Is success in angel investing a function of entrepreneurial experience? And does experience affect the choice of investments? I hope that my research will be able to answer these questions. Going forward, I would also like to explore community-level factors — like social capital — as I believe this would help to explain the emergence and success of entrepreneurship.