The Impact of Angel Investors on Founders of New Ventures in the Medical Technology Industry

Founders of new ventures in the medical technology (Medtech) industry require capital to establish, sustain, and grow their companies. Most founders must seek some form of external capital to meet these demands; in Medtech, the most well-known and prestigious of these is venture capital (VC). However, another type, angel investors, may be as important as VCs. Angels are accredited investors that invest their own money directly in new ventures. Founders of new Medtech ventures may choose to seek capital from angel investors in addition to, or instead of, venture capitalists. Unfortunately, there is little research available on outcomes for founders and their firms when angel investors are involved. Like VCs, angels seek financial returns from their investments; however, there may be additional and different motivations at play that make angels willing to grant more friendly terms to founders. As a result, it may actually be advantageous for founders to seek capital from angel investors. This paper addresses the question of whether founders of new ventures in the Medtech industry have better outcomes in terms of ownership and control of the company when one or more investment rounds involve angel investors in addition to, or in place of, VCs. Ownership is measured by the amount of equity owned just prior to an IPO, and control by the presence of founders as employees or directors at the time of the IPO. Analyzing S-is from the last 10 years of initial public offerings (IPOs), a dataset was constructed that comprised the shareholders of the 63 Medtech companies that experienced an IPO between 2001 and 2010. Of these, 18 companies had some presence of angel ownership that could be gleaned from the S-1; of those, 12 had at least a 5% stake belonging to angels. Results presented in the paper show, for the first time, those founders of Medtech firms with angel investors as shareholders at the time of IPO have significantly greater ownership of shares and significantly greater control of the firm as an employee or director than founders of firms without angels present. Angel-backed firms required less investment capital and no more time to reach the IPO, and, importantly, did not suffer with respect to the overall valuation of the firm. On the contrary, there was a trend of firms and founders themselves seeming to benefit from a valuation perspective, and significantly better from a multiple perspective, when angel investors were present. Even when firms received backing from venture capitalists, angel investor involvement also seemed to generally improve the performance of the firm and of the founders along the measured dimensions. Thesis Supervisor: Carl M. Berke; Lecturer, Harvard-MIT Division of Health Sciences & Technology Thesis Supervisor: Jonathan J. Fleming; Senior Lecturer, MIT Sloan School of Management Table of