Friends or Foes? The Interrelationship between Angel and Venture Capital Markets

This paper develops a theory of how angel and venture capital markets interact. En-trepreneurs first receive angel then venture capital funding. The two investor types are ‘friends ’ in that they rely upon each other’s investments. However, they are also ‘foes’, because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We also ex-amine the role of legal protection for angel investments