An Empirical Study of Informal Venture Capital: Structure, Strategy, and Investment Performance – Risk and Returns

Abstract

This dissertation explores the performance and risk dynamics of staged investing in informal venture capital markets, focusing specifically on angel group behavior. Drawing on a proprietary dataset of 954 investment rounds across three long-standing U.S. angel groups, the research tests whether core assumptions from venture capital theory—particularly staging theory—hold true in settings characterized by limited governance, decentralized decision-making, and behavioral complexity. The first study tests the boundary conditions of staging theory by comparing the returns of first-time versus follow-on angel investments. Contrary to theoretical expectations, first-time investments significantly outperform follow-ons across realized and total internal rate of return (IRR), distributions to paid-in capital (DPI), and other capital efficiency metrics. Follow-on rounds, while less volatile, exhibit a higher rate of total capital loss, suggesting diminished strategic value and potential behavioral distortions such as escalation of commitment. The second study extends this analysis with a comprehensive risk assessment, incorporating volatility, variance, and survivorship measures. Kaplan–Meier survival analysis reveals that first-time investments not only deliver superior returns but also persist longer before failure. Quantile regressions further show that outperformance by first-round investments is concentrated in the upper tail of the return distribution— consistent with power-law dynamics typical in venture investing. Together, these papers challenge prevailing assumptions about follow-on investing and make theoretical contributions to staging theory, portfolio theory, and behavioral finance. Practically, the findings urge angel investors and syndicates to reassess capital allocation strategies and implement more rigorous governance and behavioral safeguards. The research advances understanding of early-stage investment decision-making and offers a more contextually grounded framework for evaluating follow-on investments in informal venture capital markets.