Analysis Of The Growth Of Angel-backed Companies

Angel investment can alleviate the difficulties of financing for start-ups,and provide funding,social capital and other resources to the invested enterprises.Angel investors are experienced investors,who use their own funding to conduct investment activities.They mainly focus on investing in the early stages of start-ups.In recent years,the number of listed companies which are backed by angel investors has gradually increased.Angel investors can get high return by selling their shares after IPO.However,some angel investors choose to hold shares after the lock period ends and may play different roles in these companies,such as �voting with feet�(shareholders)or �voting by hands�(directors).It has an impact on the internal governance of the invested companies' shareholding structure and board governance.In modern firms,the management rights is separated from ownership.Thus,there is agency risk between angel investors and entrepreneurs of start-ups.Information asymmetry problem exists between angel investors and entrepreneurs of start-ups.If a start-up hopes to achieve rapid growth in the future,both the endeavor of entrepreneurs and the help of investors are needed.As important investors in the seed stage of start-ups,angel investors play an important role in the development of start-ups by providing a series of value-added services such as supervision and certification for the invested enterprises.On the one hand,by occupying a proportion of start-ups' shares,angel investors can affect the ownership structure of the invested enterprises.Then,they can supervise the work of agents(entrepreneurs)by exercising shareholders' rights and restrict the agents' pursuit of private interests.On the other hand,angel investors can also exercise directors' rights by joining the board of directors(with shareholders' rights),so as to play its role of guidance and certification better.The behavior of angel investors in the board will change the original decision-making mechanism of the invested company,and affect the internal governance model of the invested enterprise.Thus,angel investors have strong impact on the governance of the invested enterprise.As we know that governance of start-ups greatly affects their development.So,whether and how the participation of angel investors promote the growth of invested enterprises?In this paper,we study the effect of angel investors on the entrepreneurial firms' growth and its mechanism by drawing on the principal-agent theory.And 406 samples,containing the information about these listed firms and their angel investors are collected from Shenzhen GEM between 2009 and 2014.The results show that angel investment significantly improves the growth of companies by influencing the internal governance of the invested enterprises and reducing the information asymmetry of them.The impact mechanism of angel investment on enterprises' growth includes two aspects.Firstly,angel investment,especially angel investment joint investment promotes the growth of entrepreneurial enterprises,we find that it has a non-linear relationship between angel investors' shareholding ratio and the growth of listed companies,the graph of the relationship is like � �.Secondly,angel investors can optimize the ownership structure of the invested enterprises.The more reasonable the equity check-and-balance of the enterprises is,the stronger supervisory power angel investors and other external shareholders have.Reasonable equity checks and balances can make enterprises reduce agency costs,form a good internal governance mechanism for entrepreneurial enterprises,and make scientific management decisions.Further analysis indicates that the higher equity counterbalance a firm has,the more significant the mediating effect is.Moreover,we find that the mediation effect disappears in high equity concentration firms.Finally,the participation of angel investors who act as both shareholder and director position in firms positively moderates the relation between angel investment and entrepreneurial firms' growth.The higher the participation of angel investors in the board of directors is,the stronger the supervision of board members is.Meanwhile,the higher participation of angel investors can also make investors and entrepreneurs share a more consistent goal,which will not become �conspiracy�.All these benefits brought by angel investors can help enterprises grow rapidly.This study offer two potential contributions.Firstly,based on different internal governance paths,this paper studies the impact and mechanism of angel investment on the growth of GEM enterprises in China,and expands the research level of angel investment.Secondly,from the perspective of "principal-agent relationship" between angel investors and entrepreneurs,this paper reveals the influence path of angel investment on enterprise growth,and provides data support and empirical evidence for principal-agent theory.