Should Angel-Backed Start-Ups Reject Venture Capital?

The conventional wisdom is that entrepreneurs seek financing for their high-growth, high-risk start-up companies in a particular order. They begin with friends, family, and “bootstrapping” (e.g., credit card debt). Next they turn to angel investors, or accredited investors (and usually ex-entrepreneurs) who invest their own money in multiple, early-stage start-ups. Finally, after angel funds run dry, entrepreneurs seek funding from venture capitalists (VCs), whose deep pockets and connections lead the startup to an initial public offering (IPO) or sale to a larger company in the same industry (trade sale).

That conventional wisdom may have been the model for start-up success in the past, but this Article challenges its continuing applicability. In particular, this Article argues that some start-ups that attract angel funding should stop there, rejecting offers of venture capital. It challenges the notion that venture capital is a necessary condition for start-up success and argues the counterintuitive proposition that venture capital may actually be harmful to entrepreneurs and angel investors in some situations.