Entrepreneur Heterogeneity and New Venture Financing

Abstract

We explain the coexistence of different financiers like Venture Capital (VC) and Angel investors and study the role of policymakers in promoting innovation. VC investors are better informed. However, Angel investors offer entrepreneurs a better avenue to capture entrepreneurs' motivational factors. We show that policy measures to enhance entrepreneurial activity should focus on promoting VC ventures rather than Angel ventures. Our model implies that profitable industries and locations with better entrepreneurial ecosystems attract more Angel financing; Boom periods exhibit more Angel financing; Angel-backed ventures are smaller, and are less likely to be liquidated compared to VC-backed ventures.