Angel investors and the market for angel investments

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Abstract

The market for angel capital – where individuals provide risk capital directly to small, private, often start-up firms – operates in almost total obscurity. Very little is known about the market's size, scope, the type of firms that raise angel capital, and the types of individuals that provide it. In this paper I present evidence on the angel market gathered from my field research which has involved interviews with more than a dozen angel investors in the Dallas/Fort Worth area. The angel market appears to be a very heterogeneous and localized market. With that qualification in mind, I present some common characteristics of the angels I interviewed, and how they select and monitor their investments. I pay particular attention to how they address adverse selection and moral hazard problems. I compare their behavior with venture capital limited partnerships in the more formal market for venture capital.

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1

Tel.: 1 214 922 5230; fax: 1 214 922 5194; e-mail: [email protected].

2

The views expressed herein are my own and not necessarily those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

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