Angels and Venture Capitalists: Substitutes or Complements?

Understanding an entrepreneurial finance ecosystem requires an appreciation of how different investors interact with each other. Angels and venture capitalists constitute two very important investors in start-ups. We develop and empirically test hypotheses about the interactions between these two investor types. The focus is on the dynamics of the funding path of start-up companies. We ask whether angels and VCs are complements or substitutes, and also whether funding decisions are primarily investor- or company-led. Using a unique database from British Columbia, Canada, we show that angel and VCs are dynamic substitutes. An instrumental variable approach based on available tax credits for investors suggests that the substitutes relationship is company-led. The dynamic substitute pattern applies across the performance range for companies. It is more pronounced for casual angels and angel funds than for serial angels. Overall the evidence from the entrepreneurial finance ecosystem in British Columbia suggests the presence of parallel streams for angel and VC funding, with fewer transitions across streams than is traditionally assumed.