The effect of angel and venture capital investments on the buy and hold return : a study on the US stock market

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THE EFFECT OF ANGEL AND VENTURE CAPITAL INVESTMENTS ON

THE BUY AND HOLD RETURN

A study on the US stock market

P.J.M. (Pieter) Tilleman - 11145234

Mr M.A. (Mark) Dijkstra MSc

University of Amsterdam

ABSTRACT

This thesis investigates buy and hold returns of 579 US public shares between 2000

and 2014 that have either an angel or venture capital investment as first private

equity investment. The dataset, consisting of 579 observations matched by the

country of IPO, is controlling for the market categories, size, age and leverage

ratio of the corresponding firms. The results show venture capital invested firms

have a larger buy and hold return over one, three and five years. The results,

however, also indicate that the effect of venture capital investments on the buy and

hold return after one, three and five years can be negative compared to the angel

investments, when the control variables are omitted. A robustness check is

constructed to check for alternations during the financial crisis of 2007-2011.

Keywords: Initial Public Offers, Short-run performance, Long-run performance, Angel investors,

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ACKNOWLEDGEMENT

This thesis is written under the supervision of Mr M.A. (Mark) Dijkstra MSc of the University of Amsterdam. I would like to acknowledge my indebtedness to him for the guidance and feedback during the preparation and the writing of the thesis. I appreciate all the time spent on the thesis.

Acknowledgement is also given to the Crunchbase1 database, for allowing me to access their database to acquire the data for firm funding types and industry categories. This thesis could not have been undertaken without the access to this database.

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LIST OF TABLES

TABLE 1: DIFFERENCES BETWEEN ANGEL AND VENTURE CAPITALISTS……….. 8

TABLE 2: COMPARISON OF THE RETURNS TO ANGEL AND VENTURE CAPITAL INVESTMENTS………. 11

TABLE 3: DESCRIPTIVE STATISTICS………. 16

TABLE 4: SUMMARY STATISTICS FOR THE DIFFERENT TYPES OF FIRST INVESTMENT………... 18

TABLE 5: REGRESSIONS OF THE BUY AND HOLD RETURNS………... 20

TABLE 6: SEPARATE REGRESSIONS FOR THE ANGEL AND VENTURE CAPITAL INVESTMENTS………... 22

TABLE 7: ROBUSTNESS CHECK FOR FIRMS FUNDED IN THE CRISIS AND OUTSIDE THE CRISIS………... 26

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TABLE 9: PRIVATE EQUITY INVESTORS AT THE SEED, EARLY AND LATER STAGE OF

FIRM GROWTH……….………. 36

TABLE 10: DIFFERENCES BETWEEN ANGEL AND VENTURE CAPITALISTS…… 37

TABLE 11: VARIABLES USED IN REGRESSIONS……….. 38

TABLE 12: REGRESSION OF INDEPENDENT AND CONTROL VARIABLES ON THE

DEPENDENT VARIABLE………... 39

DEPENDENT VARIABLE……….. 40

DEPENDENT VARIABLE………...… 41

TABLE 15: CORRELATION TABLE OF ALL THE RELEVANT VARIABLES……….. 42 FIGURE 1: THE DIVISON OF THE 1 YEAR BUY AND HOLD RETURN MEAN OF THE ANGEL AND VENTURE CAPITAL INVESTMENTS………... 43 FIGURE 2: THE DIVISON OF THE 3 YEAR BUY AND HOLD RETURN MEAN OF THE ANGEL AND VENTURE CAPITAL INVESTMENTS………... 44 FIGURE 3: THE DIVISON OF THE 5 YEAR BUY AND HOLD RETURN MEAN OF THE ANGEL AND VENTURE CAPITAL INVESTMENTS………... 45

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INTRODUCTION

Angel investors, who are wealthy individuals (Morrissette, 2007) experienced in building a firm, providing start-up companies with the first private equity financing. This first financing is called the seed stage, which allows the start-up firm to develop a prototype product and generate sufficient investor interest for further financing. This stage should take up to 6 months and consists of founders, friends and family. Following the seed stage finance, the early stage funding enters. Early stage funding is defined as the first round of substantial funding consisting of two parts known as the series A and series B financing, and comes from angel investors. (Branscomb & Auerswald, 2002) The capital raised during the Series A is destined for the capitalization of the company for 6 months up to 2 years as the start-up develops its product and performs the initial marketing and branding. Venture capitalists, on the contrary, provide these start-ups with the later stage financing after the early stage2.

When the start-up cannot provide the finance necessary to grow their company, they go to angel investors or venture capitalists for the required capital investment. (Tyebjee & Bruno, 1984; Hisrich & Jankowicz, 1990) According to Crunchbase3 the US angel investor market grew, between 2007 and 2013, at an annual rate of 33%. And in a 2011 OECD report, the size of this US angel investor market was estimated at 17.7 billion dollars compared to the US VC capital market of 18.3 billion dollars. (OECD, 2011)

Angel investments can have a negative effect on the buy and hold return of a firm because they have limited ability to reduce their risk through diversification and therefore concentrate rather on avoiding investments that have a total loss of the related investment, than seeking investments, generating returns in excess of 100%. (Mason and Harrison, 2002)

Venture capital investments can have a positive effect on the buy & hold return because they have more knowledge and investment experience available than an angel investor, because they have larger human and capital resources. (Mason and Harrison, 2002)

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Table in appendix 3_{www.crunchbase.com}

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To investigate the impact of different types of first investments on the buy and hold return of US public firms between 2000 and 2014 the following research question is composed:

Is there a large difference between the buy and hold return of US public firms that have an angel or venture capital investment as first investment type?

Previous research from Mason and Harrison (2002) and Bruton, Filatotchev, Chahine and Wright (2010) investigated the effect of angel and VC investments on the stock performance of public firms within the United Kingdom and France. Compared to those study’s, this thesis focusses specifically on the effect of these two types of first investments on the buy and hold return of public firms within the United States. The data within this study is obtained from Compustat, IPO scoop and Crunchbase. Combined these databases offer firm specific information of 597 US public firms.

This study, based on stock and firm specific data4 from 597 public firms from the United States, found that angel invested firms have an investment strategy return of 10,5% for the one year buy and hold return, 14,8% for the three year buy and hold return and 88.0% for the five year buy and hold return. Compared with the investment strategy return of venture capital invested firms, that have 6,3%, 11,7% and 26,5% respectively for the one, three and five year buy and hold return, the angel invested firms have on average a greater return. There is also a robustness check for the years outside-and within the financial crisis of 2007-2011, to check if the regression coefficient estimates of the two different investment types behave differently when the firms retrieved first investments during or outside the financial crisis.

The remainder of the thesis is structured as follow. The literature review discusses the relation of this thesis to the existing literature. Data and methodology introduces the model used in this research and clarifies the composition of the dataset. Then the results for angel and venture capital investments are derived and analyzed, including the robustness check. The conclusion subsequently provides a conclusive answer to the results and the last section is the discussion: describing the limitations and survivor bias in more detail.

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LITERATURE REVIEW

Angel investors are defined as accredited investors, according to the United States Securities and Exchange Commission (SEC, 2014). This commission states that an accredited investor is any individual whose individual net worth (or joint net worth with that person's spouse) is exceeding $1,000,000 or an individual with an net income larger than $200,000 in each of the two most recent years (or joint income with their husband/wife that is larger than $300,000 in each of those years) and there is a reasonable expectancy of reaching this same level of income in the current year. (Wong, Bhatia, Freeman, 2009; SEC, 2014) However, many angels may not be accredited. Shane (2008) states that accredited investors account for only 23% of the total angel population. The Federal Reserve’s Survey of Consumer Finances estimates that over 6 million households qualify to be accredited investors, however many studies estimate the number in the US between 250,000 - 400,000 active angel investors. (Cummings, 2000) According to a paper by Linde and Prasad (1999), the average angel invested a total of $335,000 in four different firms and Shane (2008) finds that 20.8% of all the angels made only one angel investment in their lifetime. Because angels have to perform their own due diligence, they invest in firms operating in familiar industries to them, compared with venture capitalists that often focus on one or two industries. (Van Osnabrugge and Robinson, 2000; Benjamin and Margulis, 2001) Angels invest their own money in firms, which is also the criterion that differentiates angels from venture capital investors. Venture capital is invested by venture capital firms that use other people's money. They raise the money by offering multiple investors a chance to take part in a fund that is subsequently used to buy shares in a private company. (Cummings, 2000)

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TABLE 1. DIFFERENCES BETWEEN ANGEL AND VENTURE CAPITALISTS

Angel investors VC investors

Experience in sector funded Minimal Some

Times met entrepreneur before investing 5.4 9.5

Amount if sector research conducted Some/minimal Extensive/some Calculated rates of return before investing (% saying yes) 32 90

Number of people consulted before decision to invest 3 4.4

Table 2. Differences between business angels and venture capital fund managers in due diligence measures. Source: Van Osnabrugge (1998)

The primary differences between5 VC vs angel investing are timing in the company's lifecycle, investment experience, monetary size, and deal structure. The timing of the investment, within a venture capital firm, is typically not an investment at the early stage or before the expansion stage. Instead, this first round of financing is called the series pre-A or seed rounds, and include funding from friends, family and angel investors. Venture capital firms usually get involved after the Series A round (all happening after the Pre-A rounds and Early stage investments (OECD, 2011))6.

The venture capital investors have more investment experience than the angel investors, because of the larger human resources. (Van Osnabrugge, 2000) Van Osnabrugge (1998) compared the two types of investors and he mentions that the venture capital investors make more investments and manage a larger portfolio than the angel investors. 7 Other studies by Coveney & Moore (1998) acknowledge that angel investors made 3 or less investments and Fiet (1995) suggests that the detailed market knowledge of angel investors allows them to limit their market risk exposure.

5_{Table with the differences between angel and venture capital investments in the appendix} 6_{The different stages are in the appendix in table 6}

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23 investments made by venture capital investors and 4 by angel investors. Venture capital investors manage an average portfolio of 10.3 investments compared to 2 by angel investors.

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Another important difference between angel investors and venture capital investors concerns their monetary size. Angel investors generally have a smaller investment budget compared to the venture capital investors, due to the fact that angel investors use their own money to invest and venture capitalists use pension funds and capital from insurance funds to finance their investments. (Van Osnabrugge, 1998) A result of this lower capital budget is that angel investors may be unable to provide the start-up with further investments necessary in following investment rounds and according to Van Osnabrugge (1998), this will bring 2 consequences for the investment performance along with it. If the angel investor is not in the position to provide the necessary additional capital, it will put them in a negative negotiation position, regarding to a new potential investor, in relation with the valuation of the equity stake. This bad negotiation position can result in a depreciation of the initial investment made. Venture capital investors, on the contrary, use higher funding amounts and start with companies that are in the expansion stage, although not necessarily profitable. (Van Osnabrugge and Robinson, 2000; Benjamin and Margulis, 2001) Funding amounts in angel investing typically range from one thousand USD through to one million USD8, while venture capital is usually millions, tens of millions, or even hundreds of millions of dollars. (Van Osnabrugge and Robinson, 2000)

Angel investors use different deal structures than VC’s, like convertible notes and SAFEs9. These convertible notes and SAFEs don't actually transfer equity in the company to the investor until a later date, and when the start-up fails, the investors won’t get anything at all. The angel investors use these different deal structures to reduce legal costs, accelerate the rate at which the startup and angel investor can agree on terms and cut transaction overhead. In contrary, the venture capitalists use complex, convertible preferred stock10.

Venture capitalists perform more due diligence than angel investors. Van Osnabrugge (1998) stated that 71% of the VC’s, and only 8% of angel investors, take 3 or more references11.

8_{Table in the appendix} 9

Simple agreement for future equity: a simple contract between a start-up company and an investor, where capital is provided by the investor to the start-up and in return the start-up provides a warrant to the investor so the investor can issue stock at a later moment in time (Businessdictionary, 2016)

10_{Convertible preferred stock is an equity holding, giving the investor the right to claim the excess earnings of the} start-up. These excess earnings are additionally to preferred dividend

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The analyses of angel investors are minimal, informal and subjective, compared to the extensive, formal and analytical analyses of the venture capitalists according to Van Osnabrugge and Robinson (2000). Angel investors contrast by investing their own money and are therefore less accountable than venture capitalists, investing capital from pension funds and insurance companies (Benjamin & Margulis, 2000).

Angel and venture capital investors differ in their entrepreneurial experience, motives, and expected involvement as well. 87% of the angel investors in the United States have operating experience, while a typical venture capital investor has low12 or none operating experience. (Freear & Wetzel, 1992) According to Van Osnabrugge & Robinson (2000), 75 to 83% of the angel investors have start-up experience, compared to 33% of VC’s. Although it is more common13 for angel investors than for venture capitalists to work part time, as a member of the board of directors for example, they have periods of full-time commitment to help the entrepreneurial firms through challenging issues. (Van Osnabrugge & Robinson, 2000) In fact, 64% of the angel investors are actively involved: 27% of the angel investors joined the board of directors of the invested start-up, 21% of the angels are working part-time at their invested firms and 16% full-time (Storey, 2000), whereas the intention of venture capital investors of being involved in the firms operations is lower: 29% of the venture capitalists have a ‘laissez fair’14 involvement, 44% a moderate involvement and 27% keep close track to the invested firm (Macmillan, Kulow and Khoylian, 1988) Venture capitalists are, contrary to the angel investors, typically motivated by the return on investment. The primary reason for existence for venture capitalists is to return a profit on the partner’s investment. Summed up, venture capitalists are less emotionally attached and more focused on the financial return and the return on investment.

12_{Typical venture capitalists has zero operating experience. Only 40% of their time is spent in working with their} portfolio companies one or twice a month, which is not enough to understand the workings and intricacies of a start-up business Van Osnabrugge & Robinson (2000)

13_{21% of the angels work part-time compared to 16% full-time}

14_{Laissez Faire involvement, in which the venture capitalists exhibited limited involvement; Moderate involvement,} in which venture capitalists exhibited moderate involvement: and Close Tracker involvement, in which venture capitalists exhibited more involvement than the entrepreneur in a majority of the identified activities. (Macmillan, Kulow and Khoylian, 1988)

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Mason and Harrison (2000) provide a first attempt to analyze the returns to informal venture capital investments by using the data of 128 investments from a survey of 127 business angels in the United Kingdom.

TABLE 2. COMPARISON OF THE RETURNS TO ANGEL AND VENTURE CAPITAL INVESTMENTS

Rate of Return (%) Venture capital fund investments (%)

Angel capital investments (%)

Negative 64.2 39.8

0-24 7.1 23.8

25-49 7.1 12.7

50-99 9.5 13.3

100 + 12.0 10.2

Table 2. Significant at the 1% level. Source: Murray (1999)

The business angel returns in the United Kingdom are negatively skewed, where 39,8% of the exits had a total loss of the related investment, 13% generated only a partial loss or broke even in nominal terms on the investment, and only 10% of the exits generated returns in excess of 100%. In contrary, 64% of the venture capital funds have a negative rate of return, where the exit had a total loss of the related investment, 9,5% generated only a partial loss or broke even and 12% generated returns in excess of 100%. The amount of venture capital investments losing money on their investment is 24,4% higher than the amount of angel investments losing money. (Mason and Harrison, 2000) Mason and Harrison (2000) however do no state that the angel investments have a superior investment performance compared to the venture capital investments because the angel investors and venture capital investors have a similar amount of high performing investments, 10% compared to 12% respectively for angel and venture capital investments. Therefore, the most evident results from Mason and Harrison (2000) are that the angel investments are, although negatively skewed, less skewed and on average more stable than the venture capital investments.

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Bruton, Filatotchev, Chahine and Wright (2010) examine the performance effects of the angel- and the venture capital investors within firms that went public in France and the United Kingdom over the period of 1996-2002. To examine the operating firm performance (independent variable), Bruton et al. used the return on assets and return on sales, which are both measured at the end of the IPO year. They used these two ratios because it takes the size of the firm into account and guarantees that the results won’t be driven by the relative asset intensity of various firms. (Bruton et al., 2010) The study shows that angel investments have a significant value enhancing effect compared to the venture capital investments, where the effect of venture capital investments have a negative effect of -0,26515 on the return of assets compared to 0,16516 for the angel investments and for the return on sales, the venture capital investments have a negative effect of -0,11815 compared to 0,12515 for the angel investments. Their analysis brings the multiple agency perspective into focus, where they argue the negative impact of the venture capital investments on the IPO performance17. According to Arthurs et al., (2008) this impact should be negative because the venture capitalists have a greater agency role towards their institutional investors, reducing the willingness of the venture capitalists to protect the long-term interests of the concerning firm and by putting pressure on underwriters. (Arthurs et al., 2008) However, when the interaction term between the venture capital and UK dummy; angel capital and UK dummy is constructed, there is a difference between the effect of the type of investment on firm performance. The venture capital investments within the UK have a significant16 positive effect of 0,379 on the firm performance compared to negative venture capital effect of -0,265 for the French investments. The angel investments in France, on the contrary, have a significant16 positive effect of 0,165 on the firm performance compared to the negative effect of -0,149 of the angel investments in the UK. Hence in this paper both the angel investments and venture capital investments have a positive and negative effect on the performance of IPO firms in the United Kingdom and France. (Bruton et al., 2010)

Conclusive, the literature of Mason and Harrison (2002) constructed 4 points about the investment performance of angel investments. The returns from angel capital invested firms are

15_{Statistically significant at the 1% level} 16

Statistically significant at the 10% level 17_{RoA and RoS}

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negatively skewed, where approximately 40% lost money, about 50% generated modest returns and only 10% generated a return in excess of 100%. Compared with the returns of venture capital investments, the angel investments have fewer investments performing poorly, more investments performing moderate and about the same number of high performing investments. This is also in line with the view of Benjamin and Margulis (1996) that the angel investments are more concerned with avoiding the negative investments, because of their limited ability to diversify, than specifically focus on acquiring the high performance investments. Bruton et al., (2010) conclude that the performance outcomes of the two different investment types differs between the UK and France because of specific control outcomes such as the concentration of angels and venture capital investors within a country.

DATA AND METHODOLOGY

REGRESSION

This research uses a standard ordinary least squares regression (OLS-regression) to test the influence of the type of first private equity investment (angel or VC) on the one, three and five year buy and hold return of the US public firms between 2000 and 2014. The regression model looks as follows:

𝐵𝑢𝑦 𝑎𝑛𝑑 𝐻𝑜𝑙𝑑 𝑅𝑒𝑡𝑢𝑟𝑛_𝑖 = 𝛽₀ + 𝛽₁ ∗ 𝐷𝑢𝑚𝑚𝑦 𝐴𝑛𝑔𝑒𝑙 + 𝛽₂∗ 𝐷𝑢𝑚𝑚𝑦 𝐶𝑎𝑡𝑒𝑔𝑜𝑟𝑦 + 𝛽₃∗ 𝑆𝑖𝑧𝑒_𝑖 + 𝛽₄∗ 𝐴𝑔𝑒_𝑖 + 𝛽₅∗ 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜_𝑖 + 𝜀_𝑖 (1)

The dependent variable is the one year, three year or five year buy and hold return, including the dividend of the corresponding years. The regression further includes a constant, the dummy variable for the type of first investment made, multiple control variables, and an error term. The regression is also tested for year fixed effects. The control variables are the category dummy, size, age, and the leverage ratio.

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MEASURES

The stock market information of US public firms is used to calculate the one, three and five year Buy and Hold Return of the firm’s stock. The buy and hold return is the return of an investment strategy, where the investor will not perform any trading on his/her stock portfolio between the initial selection of the security and the end of the pre-determined time period. The buy and hold return is calculated by adding the dividends of the respective stock to the end of period value minus the initial stock value divided by the initial stock value.

(one,three or five year close price + Dividends) − 1st day close price

1st day close price x 100% (2)

The first private equity investment dummy has a value of one when the first private equity investment is an angel investment and zero when it’s a venture capital investment. The other types of capital investments, such as the equity crowdfunding and debt financing are omitted from the regressions, because this thesis investigates the effect of angel and venture capital on the buy and hold returns.

16% of the firms are pharmaceutical or biotechnical and 96,72%18 of these firms are venture capital backed. Hence, the dummy variable category is used as a control variable to check for the effect of the type of firm (pharmaceutical/biotechnical or not) on the buy and hold return of the other firm categories. The dummy category for these firms has a value of one when the firm is a pharmaceutical or biotechnical firm and zero when it’s in another industry category.

The debt of the firm can limit the discretion of managers and alleviate or increase potential agency conflicts (Williamson, 1988), because debt serves both as a signal and as a check against managerial discretion. If issuing debt will allow the market to make inferences about the quality of the firm's investments, and these inferences are subsequently reflected in the

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Interaction term between the Dummy funding type (one if angel finance) and Dummy category (one if pharmaceutical/biotechnical firm) is 3,28%

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valuation, then this debt could be used to persuade the market to believe that the management rather pursues higher profits than perquisites. (Grossman & Hart, 1982) The management deliberately changes its incentives (by issuing debt and therefore the resulting effect on the market value) in a way that brings them in line with the incentives of the shareholders. Hence the agent (management) acts in the interest of the principal (shareholders). Therefore to control for these possible effects of debt on the firm’s IPO valuation, the leverage ratio or the book debt/asset ratio is used. The leverage ratio is constructed by the total long-term debt to book value of total assets. The total debt consists of both the long-term and short-term debt. This ratio is provided by the Compustat database, as an additional control variable (Bruton et al., 2010).

The dataset could be influenced by a recession, because firms, holding their IPO before the recession, can gain lower one, three or five year buy and hold returns during the recession. Angel investors could be hit harder than venture capital investors because they have a smaller capital buffer than the VC’s (Mason & Harrison, 2002) Due to the fact that the dataset can be influenced by the latest recession of 2008-2011, a crisis dummy variable is created with a value of one when the IPO date is between August first 2007 and August first 2011.19

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The dates within Stata are changed to numerical numbers. Crisis period is between the numbers: 17379 and 18840. When the IPO date of a firm is located between these 2 numbers then the dummy will have a value of 1.

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DATASET

The sample covers the years 2000 to 2014. The information necessary for the research variables are: the trade date, IPO date, ticker of the firm, company name, 1st day closing price of the IPO, one year close price, three year close price, five year close price, company category, first investment type, age and the size of the firm. Table 1 shows the descriptive statistics with all the constructed variables.

TABLE 3. DESCRIPTIVE STATISTICS

VARIABLES20 N mean sd min max

Dummy Angel 579 0.157 0.364 0 1

BH1 571 0.0694 0.783 -0.960 8.540

BH3 348 0.122 1.274 -0.970 16

BH5 248 0.405 2.215 -1 22.13

Dummy category 578 0.369 0.483 0 1

Size (Log of Total Assets) 407 8.775 0.827 5.479 11.34

Age (Years) 283 10.54 8.970 0.0822 105.9

Total assets (Bln $) 578 2.739 14.290 0 219.100

Total debt (Bln $) 578 0.362 1.645 0 30.660

Leverage ratio (Debt/Asset Ratio) 407 0.175 0.230 0 1.010

Crisis 579 .2003454 .4006049 0 1

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The first dataset is from IPO scoop. This website is owned by IPOscoop.com and they offer IPO content through an automated XML data feed. Within this data feed they offer a complete excel file with the company name, expected trading dates, ticker, brief business description, filing date, shares volume and price low and price high. This database is collected by downloading the free excel file from 2000 to 2016 of their website21 and within this research it is used for the trade date; ticker; company name and 1st day close price of 579 US firms that held their IPO between the first of January 2000 and December 31 2014. The one year; three year and five year price, used to calculate the one, three and five year buy and hold return of the 579 US public stocks, are retrieved from the Compustat database.

The control variables dummy angel and dummy category are constructed to check for the type of first private equity investment and the industry category of the 579 US public firms. (Brav & Gompers, 1997) The data for these two dummy’s is collected from the Crunchbase22, which is a free database of technology companies and investors, where they collect information about 200,000+ start-up company contributors and 2000+ venture partners through an open source editing. This database has a list for the investment types, the rounds these investments are made in, age of thefirm and provides the industry category of the firms.

Furthermore, the regression is controlled for the IPO size, measured in the natural logarithm of total assets (total assets in dollars). The data is provided by the Compustat database. In this study it’s expected that the returns decrease in size, because in the study of Fama and French (2011) it’s examined that the size of an US public firm negatively influences the stock returns. Besides the size the regression is controlled for the age of the public firm. The age is measured by the number of years between the firms founding year and its IPO year. The age control variable is constructed by making use of the Crunchbase database23. This control variable is used for the type of firm going public and should capture the risk of the IPO, as the firm’s age can influence the returns negatively or positively (Ljungqvist and Wilhelm, 2002) Older companies can be less risky than their younger counterparts since they could have gained more

21_{https://www.iposcoop.com/scoop-track-record-from-2000-to-present/} 22

Retrieved at www.crunchbase.com 23_{Retrieved at www.crunchbase.com}

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experience over the years, but the greater amount of time between the founding date and IPO could also indicate a lack of trust of the investors to go public. (Flagg, 2012)

TABLE 4: SUMMARY STATISTICS FOR THE DIFFERENT TYPES OF FIRST INVESTMENT

Venture capital Angel capital Other capital

VARIABLES24 N mean N mean N mean

1st day price 480 18.12 90 17.07 1,182 17.98

Buy and Hold Return 1 (%) 481 0.0628 90 0.105 1,183 0.0477

Buy and Hold Return 3 (%) 288 0.117 60 0.148 740 0.337

Buy and Hold Return 5 (%) 205 0.265 43 0.880 534 0.665

Total assets (Bln $) 488 2.895 90 1.894 1,196 4.156

Leverage ratio (%) 343 0.178 64 0.163 855 0.206

Age (Years) 250 10.72 33 9.190 431 20.59

Table 4. Summary statistics, indicating the Number of observations and mean for each of the 3 investment types. Buy and hold return after 5 year is winsorized for outliers. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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Table 4 provides the summary statistics for the different types of first investment. The mean of the one year buy and hold return for venture capital invested firms is 6.28%. The three year return is 11.7% and the five year buy and hold return is 26.5%. The investment strategy returns of angel invested firms is 10.5% for the one year buy and hold return, 14.8% for the three year buy and hold return and 88.0% for the five year buy and hold return. The dummy for pharmaceutical/biotechnical category is larger for venture capital invested firms than angel capital invested firms (39.8% of the venture capital investments and 20.9% of the angel capital investment), indicating that venture capital investors rather invest in pharmaceutical or biotechnical firms than firms in other categories. Furthermore the venture invested firms have a higher leverage ratio of 17.8% compared to 16.3% for angel capital. Venture capital invested firms have an average of 10.72 years between their founding year and IPO date, and the angel capital invested firms have an average of 9.19 years between the founding year and IPO date, so it takes longer for venture capital invested firms to go public than for angel invested firms.

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RESULTS

TABLE 5: REGRESSIONS OF THE BUY AND HOLD RETURNS

VARIABLES BH1 BH1 BH1 BH1 BH1 BH1 Dummy Angel 0.042 0.038 -0.050 -0.169 -0.163 -0.191 (0.090) (0.090) (0.153) (0.180) (0.180) (0.181) 1st day price -0.006** -0.006 -0.012** -0.013*** -0.013*** (0.003) (0.004) (0.005) (0.005) (0.005) Age (Years) -0.003 -0.009 -0.010 -0.009 (0.005) (0.009) (0.009) (0.009)

Log (Total Assets) 0.225*** 0.257*** 0.252***

(0.083) (0.088) (0.088) Leverage ratio (%) -0.305 -0.257 (0.272) (0.275) Dummy category -0.157 (0.122) Constant 0.063* 0.174*** 0.202* -1.494** -1.693** -1.600** (0.036) (0.063) (0.112) (0.713) (0.734) (0.738) Observations 571 570 281 219 219 218 R-squared 0.000 0.009 0.009 0.053 0.059 0.064

Year FE YES YES YES YES YES YES

Adjusted R-squared -0.00137 0.00513 -0.00140 0.0355 0.0366 0.0379 VARIABLES BH3 BH3 BH3 BH3 BH3 BH3 Dummy Angel 0.031 0.029 -0.388 -0.616 -0.604 -0.627 (0.181) (0.180) (0.377) (0.453) (0.451) (0.457) Observations 348 348 147 111 111 110 R-squared 0.000 0.011 0.031 0.103 0.121 0.119

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Controls NO YES YES YES YES YES

Adjusted R-squared -0.00280 0.00512 0.0106 0.0692 0.0786 0.0674 VARIABLES BH5 BH5 BH5 BH5 BH5 BH5 Dummy Angel 0.811** 0.815** -0.311 -0.404 -0.419 -0.397 (0.369) (0.364) (0.419) (0.432) (0.428) (0.438) Observations 248 248 101 78 78 77 R-squared 0.019 0.047 0.028 0.119 0.145 0.138

Controls NO YES YES YES YES YES

Adjusted R-squared 0.0153 0.0395 -0.00237 0.0703 0.0854 0.0639 Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Table 5. Merged25 table of the regressions of independent and control variables on the 3 dependent variables: the buy and hold return after one, three and five years. The regressions on the three and five year buy and hold return have the same sequence of control variable added as the one year buy and hold return regression. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

25

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TABLE 6. SEPARATE REGRESSIONS FOR THE ANGEL AND VENTURE CAPITAL INVESTMENTS

Venture capital invested firms Angel invested firms

VARIABLES BH1 BH3 BH5 BH1 BH3 BH5

Dummy category -0.120 -0.245 0.040 -0.570 0.046 2.067** (0.135) (0.437) (0.425) (0.341) (0.480) (0.783) 1st day price -0.013** -0.030** -0.021 -0.060** -0.006 -0.099

(0.005) (0.015) (0.013) (0.024) (0.046) (0.080) Log (Total Assets) 0.291*** 0.831*** 0.821*** -0.048 0.047 -0.181

(0.096) (0.293) (0.256) (0.219) (0.324) (0.554) Leverage ratio (%) -0.384 -0.972 -0.872 1.065 -1.058 -3.615* (0.297) (0.856) (0.758) (0.727) (0.998) (1.659) Age (Years) -0.009 -0.047 -0.033 -0.004 -0.036 -0.008 (0.009) (0.030) (0.032) (0.021) (0.030) (0.053) Crisis -0.080 -0.095 -0.785 0.144 -0.143 0.437 (0.156) (0.511) (0.481) (0.410) (0.575) (0.902) Constant -1.914** -5.639** -5.812** 1.507 0.255 4.037 (0.804) (2.511) (2.252) (1.831) (2.860) (4.928) Observations 192 92 62 26 18 15 R-squared 0.070 0.123 0.218 0.319 0.175 0.607

Adjusted R-squared 0.0401 0.0609 0.133 0.104 -0.275 0.312 Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Table 6. Differences between the effect of the independent variables on the three dependent variables, for the two types of first investment: venture capital invested firms and angel invested firms. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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The analysis in table 5 presents the OLS regressions for the one, three and five year buy and hold returns of US public firms between 2000 and 2014. This table indicates that the dummy angel is not statistically significant at the 1%, 5% or 10% level, except for the regression on the five year buy and hold return where the control variables are omitted. The independent variables are the dummy for the funding type, the 1st day closing stock price, the dummy for the firm category, age of the firm, leverage ratio and size of the firm. The 1st day price is statistically significant at 1% and 5% level and age is statistically significant at 10% for the regression on the three year buy and hold return. The firm size variable positively affects the buy and hold return and it’s statistically significant at 1%, 5% and 10%. The results are indicating that a bigger firm increases the one year buy and hold return with 0.252, the three year buy and hold return with 0.703 and the five year buy and hold return with 0.682. (Jangili and Kumar, 2010)

Table 6, however, indicates that there is a difference between the effects, of the independent variables on the dependent variables, when there is a distinction made between the two types of first investment. The size has a significant positive effect on the one, three and five year buy and hold return for the venture capital invested firms, but it has a negative, insignificant, effect for the angel invested firms. The same applies to the other independent variables, where there is a clear distinction between the coefficients of the venture capital invested- and angel invested firms. Therefore a chow test is constructed to test whether the coefficients of the two regressions are the same. (Chow, 1960) The results from the chow-test show that the angel dummy is also significant. (Studenmund, 2011) This research wants to allow the two groups within the dummy (the angel and venture capital invested firms), to have completely different regression equations, i.e. allowing the intercept and all slopes to differ. To allow the slopes and intercept to differ between angel and VC invested firms, the equation is written into two separate unrestricted models.26 Restricted model: 1/3/5 𝑌𝑒𝑎𝑟 𝐵𝑢𝑦 𝑎𝑛𝑑 𝐻𝑜𝑙𝑑 𝑅𝑒𝑡𝑢𝑟𝑛_𝑖 = 𝛽₀+ 𝛽₁∗ 𝐷𝑢𝑚𝑚𝑦𝑐𝑎𝑡𝑒𝑔𝑜𝑟𝑦 + 𝛽₂∗ 1𝑠𝑡𝑑𝑎𝑦 𝑝𝑟𝑖𝑐𝑒 + 𝛽₃∗ 𝐴𝑔𝑒 + 𝛽₄∗ 𝑆𝑖𝑧𝑒 + 𝛽₅∗ 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 + 𝜀_𝑖 26

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24 Unrestricted models: 1/3/5 𝑌𝑒𝑎𝑟 𝐵𝑢𝑦 𝑎𝑛𝑑 𝐻𝑜𝑙𝑑 𝑅𝑒𝑡𝑢𝑟𝑛_𝑖 = 𝛽₀1_{+ 𝛽} 11 ∗ 𝐷𝑢𝑚𝑚𝑦𝑐𝑎𝑡𝑒𝑔𝑜𝑟𝑦𝑖 + 𝛽21∗ 1𝑠𝑡𝑑𝑎𝑦 𝑝𝑟𝑖𝑐𝑒𝑖+ 𝛽₃1_{∗ 𝐴𝑔𝑒} 𝑖 + 𝛽41∗ 𝑆𝑖𝑧𝑒𝑖+ 𝛽51∗ 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜𝑖 + 𝜀𝑖1 1/3/5 𝑌𝑒𝑎𝑟 𝐵𝑢𝑦 𝑎𝑛𝑑 𝐻𝑜𝑙𝑑 𝑅𝑒𝑡𝑢𝑟𝑛_𝑖 = 𝛽₀2_{+ 𝛽} 12∗ 𝐷𝑢𝑚𝑚𝑦𝑐𝑎𝑡𝑒𝑔𝑜𝑟𝑦𝑖 + 𝛽22∗ 1𝑠𝑡𝑑𝑎𝑦 𝑝𝑟𝑖𝑐𝑒𝑖+ 𝛽₃2_{∗ 𝐴𝑔𝑒} 𝑖 + 𝛽42∗ 𝑆𝑖𝑧𝑒𝑖 + 𝛽52∗ 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜𝑖 + 𝜀𝑖2 𝐻0: 𝛽₁1 _{= 𝛽} 12 , 𝛽21 = 𝛽22 , 𝛽31 = 𝛽32 , 𝛽41 = 𝛽42 , 𝛽51 = 𝛽52 𝐻1: 𝐻0 𝑛𝑜𝑡 𝑡𝑟𝑢𝑒 Chow-test: 𝐶ℎ𝑜𝑤 = (𝑅𝑆𝑆𝑚−𝑅𝑆𝑆1−𝑅𝑆𝑆2)/𝑘+1 (𝑅𝑆𝑆1+𝑅𝑆𝑆2)/(𝑛1+𝑛2−2(𝑘+1)~𝐹𝑘,𝑛−2(𝑘+1) F = (320.33688−142.013429−10.8093746)/(5+1)

(142.013429+10.8093746)/(193+26−2(5+1)) = 37.817 > critical value of 3.02 so significant.

The results of the Chow Test show that the restricted model is rejected in favor of the unrestricted models. The conclusion is therefore that angel invested firms and venture capital invested firms have significantly different regression equations.

Table 5 measures how the type of first investment affects the short, one year buy and hold return, and long run firm performance, in term of the three and five year buy and hold return. The results show that, when the first investment is an angel investment, this investment yields a 4.2% higher positive effect on the one year buy and hold return compared to when the first investment is a venture capital investment. The positive effect on the three buy and hold return is 3.1% higher and the five buy and hold return is 81.1% (significant at the 5% level) higher than that of venture capital invested firms. However, when adding the control variables27, the results in table 5 show that angel invested firms yield a 19.1% smaller one year buy and hold return than the venture capital invested firms, 62.7% smaller three year buy and hold return and

27

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39.7% smaller five year buy and hold return. This is inconsistent with previous studies arguing venture capital investors may take companies public in order to gain new capital in future funding rounds and increase their profile in the market. (Lerner, 1995; Black & Gilson, 1998).

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ROBUSTNESS

TABLE 7. ROBUSTNESS CHECK FOR FIRMS FUNDED IN THE CRISIS AND OUTSIDE THE CRISIS

Pre/Post Crisis Crisis

VARIABLES BH1 BH3 BH5 BH1 BH3 BH5 Dummy Angel -0.201 -0.632 -0.614 -0.167 -0.426 0.522 (0.218) (0.539) (0.519) (0.269) (0.756) (0.580) 1st day price -0.015** -0.029* -0.020 -0.003 -0.030 -0.051 (0.006) (0.015) (0.014) (0.010) (0.049) (0.046) Dummy category -0.211 -0.377 0.389 0.030 0.506 0.423 (0.159) (0.444) (0.462) (0.154) (0.556) (0.500) Log (Total Assets) 0.265** 0.822** 0.813** 0.200* 0.511 0.537

(0.114) (0.313) (0.313) (0.101) (0.425) (0.355) Leverage ratio (%) -0.385 -1.617* -1.871** 0.015 0.941 0.695 (0.346) (0.886) (0.866) (0.345) (1.099) (0.885) Age (Years) -0.010 -0.053 -0.046 -0.008 -0.041 -0.009 (0.011) (0.034) (0.036) (0.010) (0.029) (0.033) Constant -1.617* -5.331* -5.521* -1.547* -3.848 -4.247 (0.964) (2.704) (2.791) (0.808) (3.193) (2.600) Observations 168 87 60 50 23 17 R-squared 0.069 0.144 0.204 0.123 0.262 0.312

Adjusted R-squared 0.0341 0.0801 0.114 0.000798 -0.0143 -0.101 Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

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27 According to a report of the OECD (2011, p.96)

“Following the recent financial crisis, access to finance for start-ups has become a growing

concern. With banks hesitant to extend loans to start-ups with no assets or credit history, equity has become increasingly important.”

The crisis caused a stressful environment for the firms within the United States, because there was a credit crunch making it harder to get financing. (Keeley and Love, 2010) Because of this stressful environment, the period before; during and after the crisis can be useful to provide a robustness check. In this part, the regression is separated to check for robustness and it is done by dividing the regressions28 on the one, three and five year buy and hold returns for companies that had their first private equity investment during the financial crisis29 and outside of this financial crisis. This diversification is performed in order to check how the regression coefficient estimates behave on the financial crisis. One robustness check contains the time period of first investments made before and after the crisis and the other check contains the time period of the crisis: the first of August 2007 till the first of August 2011.

Table 7 displays this robustness check where the first 3 columns show the insignificant regression coefficients of the firms with first investments made outside of the crisis and the last 3 columns display the firms with first investments made during the crisis. The dummy angel in table 7 indicates that there is a difference between the angel and venture capital investments made during and outside the crisis. Firms receiving angel investments outside the crisis have a poorer negative effect of 20.1%, 63.2% and 61.4% respectively on the one, three and five year buy and hold returns compared to the venture capital invested firms. Angel invested firms during the crisis have (compared to the first 3 columns) a better effect on the one; three and five year buy and hold returns. During the crisis the angel invested firms have a smaller negative effect on the one year buy and hold return of 16.7% compared to the 20.1 % outside the crisis. The same applies to the three year buy and hold return where the angel invested firms yield a smaller negative effect of 42.6% compared to the 63.2% outside of the crisis. And the angel invested

28_{Including all the control variables} 29

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firms yield a positive effect on the five year buy and hold return of 52.2% compared to the negative 61.4% outside the crisis.

This means that venture capital invested firms performed worse during the crisis than outside of the crisis compared to angel invested firms. According to an OECD report (2011) this could be due to the continued difficult economic environment, where the angel investors have been playing a significant role in filling the financial gaps left by the banks and venture capital firms. (OECD, 2011) However the dummy angel regression coefficients are insignificant and therefore it is not possible to draw a reliable conclusion from the robustness check.

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CONCLUSION

This thesis contains a sample of 579 US public firms between 2000-2014, financed with either an angel or venture capital investment as their first investment. Regressions are constructed, using this sample, to investigate the effect of two different types of first private equity investments on the short-and long run30 buy and hold return of the firm’s stocks. The angel investments yielded larger positive effects of 4.2% on the one year buy and hold return, 3.1% on the three buy and hold return and 81.1% on the five year buy and hold return, compared to when the first investment is a venture capital investment. However, when adding the control variables31, the results in table 5 show that angel invested firms yielded negative effects of 19.1% on the one year buy and hold return, 62.7% on the three year buy and hold return and 39.7% on the five year buy and hold return, compared to the venture capital invested firm. The dummy variable for the funding type is not significant (except for the effect on the five year buy and hold return) hence it is not possible to conclude this with certainty. The robustness check indicates that firms receiving their first angel investment during the crisis yield better buy and hold returns than firms receiving the first angel investment outside of the crisis. Hence applying the opposite for the venture capital invested firms, acquiring higher returns outside the crisis than during the financial crisis.

DISCUSSION

Mason and Harrison (2002) and Van Osnabrugge and Robinson (2000) tackle the investment decision process of start-ups within their articles. Their studies focus the way venture capitalists make their investment decisions, and they conclude that angel investors have a significant performance value-enhancing effect. Bruton et al., (2010) examine the performance effects of the angel- and the venture capital investors within firms that went public in France and the United Kingdom over the period of 1996-2002 and their study indicates that angel investments have a significant value enhancing effect compared to the venture capital investments, where the effect

30_{One, three and five year buy and hold return} 31

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of venture capital investments have a negative effect of -0,265 on the return of assets compared to 0,165 for the angel investments and for the return on sales, the venture capital investments have a negative effect of -0,11812 compared to 0,12512 for the angel investments. This thesis is showing the opposite results to that of Mason & Harrison (2002); Van Osnabrugge and Robinson (2000) and Bruton et al., (2010) with the venture capital investors having the performance value-enhancing effect.

A big limitation of this thesis research is the insignificance for most of the variables constructed. Even constructing multiple control variables and running multiple regressions over different time periods did not yield the desired significant coefficients. In this thesis it is important to realize that the findings of this paper do not regard the firm performance of all US firms that hold their IPO between 2000 and 2014. This is due to the survivorship bias (Brown et al., 1992). When constructing a performance study, it is possible that there are multiple companies not existing anymore, because they went bankrupt, and therefore those firms are not included in the data sample. Within this thesis, the database IPO scoop is used to collect stock data of 2400 US public firms between 2000 and 2014. To collect the one year, three year and five year closing price of the stocks, the database Compustat is used. Not all of the 2400 public firms from IPO scoop are available within Compustat’s database, because some of the firms are acquired by other companies or went bankrupt. For this reason, the amount of firms for this research narrowed to 579 firms. Hence the data sample is constructed with a biased selection of firms that continue to exist because they are financially healthy. The findings of this thesis should therefore only be interpreted as a firm performance measure of the selected US public firms, and not as a firm performance measure of the US public market of firms that held their IPO between 2000 and 2014.

Possible future research could build on these findings by investigating the effect of all the different types of first investment (also the debt-financing and equity crowdfunding) on the various industry categories within the United States. Is there a type of first investment that acquires better returns in a certain industry category than in the other industries, and if so what type of first investment obtains higher returns?

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APPENDIX

TABLE 9. PRIVATE EQUITY INVESTORS AT THE SEED, EARLY AND LATER STAGE OF FIRM GROWTH

Informal investors Formal investors

Founders, friends and family Angel investors Venture capital funds

Seed stage investments Early stage investments Later stage investments

Table 9. The different investment stages for angel and venture capital investors. Data acquired from OECD report (2011).

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TABLE 10. DIFFERENCES BETWEEN ANGEL AND VENTURE CAPITALISTS

ANGEL INVESTORS VENTURE CAPITALISTS

Funding Source Angel’s own money Investors

Number of deals per year One every two years 5-10 per year Typical investment per

company

$1,000 - $1,000,000 $1-100 million

Company Stage Small, start-up, early stage Larger, expansion stage Geographic Focus Usually near (within one to

two hours) of home

Usually nationwide, sometimes regional Industry Focus No focus, but prefer industries

they know

Often focus on one or two industries

Source of deals Other angels, friends, business contacts

Proposals submitted, other VC’s

Decision Maker Individual, experienced entrepreneur, personal, 50 years old

Professional, MBAs, committees, 40 years old

Analysis/Due Diligence Minimal, informal, subjective, judgment

Extensive, formal, analytical, spreadsheets

Investment Structure Simple, common stock Complex, convertible preferred stock

Involvement Hands-on Strategic, board seat

Investment Time/Horizon Longer, five or more years Shorter, three to five years Exit/Harvest Strategy Less important, long term

investment horizon

Important, IPO or sell company

Return on Investment Expectations

20-30% but often don’t have predetermined ROI

expectation

Expect 30-50% ROI

Table 10. Differences between angel and venture capitalists. Sources: Van Osnabrugge & Robinson (2000), Benjamin & Margulis (2001)

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TABLE 11. VARIABLES USED IN REGRESSIONS

Variables Definitions

1. BH1 Buy and Hold Return after one year 2. BH3 Buy and Hold Return after three years 3. BH5 Buy and Hold Return after five years 4. 1stday price Stock closing price at first trading day

5. Dummy angel Dummy variable for the type of first investment made 6. Dummy category Dummy variable for the firm’s industry category

7. Size Firm size measured as the natural logarithm of Total Assets

8. Age Age of the firm measured in the years between the founding year and IPO date

9. Total Assets Book value of the firm’s total assets 10. Total Debt Book value of the firm’s total debt

11. Leverage ratio Leverage ratio of the firm measured as the percentage of the book value of total assets divided by the book value total debt

12. Crisis Dummy variable to indicate whether the firm is first funded during the financial crisis of 2007-2011 or not

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TABLE 12. REGRESSION OF INDEPENDENT AND CONTROL VARIABLES ON THE DEPENDENT VARIABLE (1) (2) (3) (4) (5) (6) VARIABLES BH1 BH1 BH1 BH1 BH1 BH1 Dummy Angel 0.042 0.038 -0.050 -0.169 -0.163 -0.191 (0.090) (0.090) (0.153) (0.180) (0.180) (0.181) 1st day price -0.006** -0.006 -0.012** -0.013*** -0.013*** (0.003) (0.004) (0.005) (0.005) (0.005) Age (Years) -0.003 -0.009 -0.010 -0.009 (0.005) (0.009) (0.009) (0.009)

Log (Total Assets) 0.225*** 0.257*** 0.252***

(0.083) (0.088) (0.088) Leverage ratio (%) -0.305 -0.257 (0.272) (0.275) Dummy category -0.157 (0.122) Constant 0.063* 0.174*** 0.202* -1.494** -1.693** -1.600** (0.036) (0.063) (0.112) (0.713) (0.734) (0.738) Observations 571 570 281 219 219 218 R-squared 0.000 0.009 0.009 0.053 0.059 0.064

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Table 12. Different regression models of the 1st day price, Age measured in time between founding year and IPO date in years, Size measured as the log of total assets, leverage ratio, dummy for the funding type, dummy for the firm category on the one year buy and hold return. Controlled for year fixed effects. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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TABLE 13. REGRESSION OF INDEPENDENT AND CONTROL VARIABLES ON THE DEPENDENT VARIABLE (1) (2) (3) (4) (5) (6) VARIABLES BH3 BH3 BH3 BH3 BH3 BH3 Dummy Angel 0.031 0.029 -0.388 -0.616 -0.604 -0.627 (0.181) (0.180) (0.377) (0.453) (0.451) (0.457) 1st day price -0.012* -0.011 -0.025* -0.027** -0.027** (0.006) (0.011) (0.013) (0.013) (0.013) Age (Years) -0.022* -0.044* -0.049** -0.048* (0.013) (0.024) (0.024) (0.025)

Log (Total Assets) 0.652*** 0.703*** 0.703***

(0.243) (0.244) (0.249) Leverage ratio (%) -1.040 -0.986 (0.720) (0.735) Dummy category -0.185 (0.351) Constant 0.117 0.325** 0.718** -4.483** -4.624** -4.567** (0.075) (0.131) (0.288) (2.098) (2.090) (2.132) Observations 348 348 147 111 111 110 R-squared 0.000 0.011 0.031 0.103 0.121 0.119

Table 13. Different regression models of the 1st day price, Age measured in time between founding year and IPO date in years, Size measured as the log of total assets, leverage ratio, dummy for the funding type, dummy for the firm category on the three year buy and hold return. Controlled for year fixed effects. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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TABLE 14. REGRESSION OF INDEPENDENT AND CONTROL VARIABLES ON THE DEPENDENT VARIABLE (1) (2) (3) (4) (5) (6) VARIABLES BH5 BH5 BH5 BH5 BH5 BH5 Dummy Angel 0.811** 0.815** -0.311 -0.404 -0.419 -0.397 (0.369) (0.364) (0.419) (0.432) (0.428) (0.438) 1st day price -0.031*** -0.008 -0.017 -0.018 -0.018 (0.012) (0.012) (0.013) (0.013) (0.013) Age (Years) -0.019 -0.028 -0.033 -0.034 (0.013) (0.026) (0.026) (0.028)

Log (Total Assets) 0.679*** 0.694*** 0.682***

(0.237) (0.235) (0.242) Leverage ratio (%) -1.022 -1.081 (0.688) (0.714) Dummy category 0.162 (0.365) Constant 0.265* 0.851*** 0.849*** -5.026** -4.850** -4.788** (0.154) (0.266) (0.316) (2.069) (2.056) (2.112) Observations 248 248 101 78 78 77 R-squared 0.019 0.047 0.028 0.119 0.145 0.138

Table 14. Different regression models of the 1st day price, Age measured in time between founding year and IPO date in years, Size measured as the log of total assets, leverage ratio, dummy for the funding type, dummy for the firm category on the five year buy and hold return. Controlled for year fixed effects. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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TABLE 15: CORRELATION TABLE OF ALL THE RELEVANT VARIABLES

Characteristics 1 2 3 4 5 6 7 8 9 10 11 (1) Dummy Angel 1.00 (2) 1stday price -0.03 1.00 (3) BH1 0.02 -0.09 1.00 (4) BH3 0.01 -0.10 0.39 1.00 (5) BH5 0.14 -0.17 0.35 0.56 1.00 (6) Dummy Category -0.14 0.00 -0.04 -0.07 -0.07 1.00 (7) Total Assets -0.03 0.13 0.02 0.04 0.01 -0.05 1.00 (8) Total Debt -0.01 0.11 -0.00 0.05 0.01 -0.02 0.21 1.00 (9) Size 0.03 0.38 0.10 0.19 0.03 -0.07 0.46 0.35 1.00 (10) Leverage Ratio -0.02 0.02 -0.02 -0.07 -0.07 0.02 -0.04 0.38 0.24 1.00 (11) Age -0.05 -0.05 -0.03 -0.13 -0.13 0.04 -0.01 -0.06 -0.05 -0.09 1.00

Table 15. Correlation between all the relevant variables. The results in this table imply that there's no correlation between the variables and therefore there is a low possibility of a multicollinearity problem. The dataset is tested for heteresokedasticity by doing a breusch-pegan test . This F-test has a p-value larger than 0.05 indicating that there’s no heteroscedasticity. Copyright 2016 by: Compustat, Crunchbase and IPO scoop

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FIGURE 1. DIVISION OF ONE YEAR BUY AND HOLD RETURN MEAN

Figure 1. This bar graph shows the division of the one year buy and hold return mean of the angel and venture capital investments. The one year buy and hold return mean of the firms with an angel investment as first investment is significantly higher than the one year buy and hold return of firms with a venture capital investment as first investment. Copyright 2016 by: Compustat, Crunchbase 0 .0 2 .0 4 .0 6 .0 8 .1 me a n o f BH 1 0 1

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FIGURE 2. DIVISION OF THREE YEAR BUY AND HOLD RETURN MEAN

Figure 2. This bar graph displays the division of the three year buy and hold return mean of the angel and venture capital investments. The three year buy and hold return mean of the firms with an angel investment as first investment is significantly higher (but smaller than in figure 1) than the three year buy and hold return of firms with a venture capital investment as first investment. Copyright 2016 by: Compustat, Crunchbase

0 .0 5 .1 .1 5 me a n o f BH 3 0 1

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FIGURE 3. DIVISION OF FIVE YEAR BUY AND HOLD RETURN MEAN

Figure 3. This bar graph displays the division of the five year buy and hold return mean of the angel and venture capital investments. The five year buy and hold return mean of the firms with an angel investment as first investment is again significantly higher than the five year buy and hold return of firms with a venture capital investment as first investment. The division between the 2 means is the largest at the five year buy and hold return. Copyright 2016 by: Compustat, Crunchbase 0 .2 .4 .6 .8 1 me a n o f BH 5 0 1

The effect of angel and venture capital investments on the buy and hold return : a study on the US stock market