I want to start by thanking Christine, Gordon, and the rest of the ‘Glom gang for inviting me to participate as a commentator on Darian Ibrahim’s terrific paper, The (Not So) Puzzling Behavior of Angel Investing. Ibrahim’s paper works to explain a perceived puzzle: why are some investors defenseless against entrepreneurial agency costs, and others increasingly brawny and well-armored by law. Both kinds of investors are called "angels."

Ibrahim shows that traditional angel contracts (call them "TACS") are rational even though they are informal in the face of perceived agency costs. He does so by advancing several arguments: (1) traditional angels don’t really face the agency costs that VCs do, because they select for entrepreneurs they know and monitor them through informal networks of trust; (2) informal TACS facilitate later VC investments, and thus increase the probable payouts for angel investments; (3) TACS are low-stakes, and legal armor is expensive; and (4) TACS are not motivated by wealth maximization, but by altruism or thrill-seeking. It strikes me that these explanations, taken together, provide a pretty good account of why TACS are informal and VC investments are not, but it raises two sorts of problems for me about the paper, both of which are relatively minor and more a matter of emphasis than substance.

First, given this story, is it really true that angel behavior is a "marked departure" from financial contracting theory? That is, I was convinced that, in fact, angel uncertainty, information asymmetry, and agency costs may be ameliorated significantly by the mechanisms that Ibrahim describes. But the paper (especially in the introduction and the conclusion) sets up the findings as a dramatic surprise. This felt a little jarring.

Second, I found it difficult to square the two different accounts of angel behavior, on the one hand coldly wealth maximizing, and on the other, an indulgence of the very rich ("it’s cheaper and more fun than buying a yacht." (p. 26).) Are angels rational, or aren’t they?

Ibrahim might seek to harmonize this story by focusing more on the different kinds of angels, with particular emphasis on his observation that some investors are repeat players (whose exposure in the aggregate is likely to be higher, and whose may therefore be more willing to invest in contracting costs). There is a large literature on repeat-player contracts to be exploited here. This would help to transition the paper to the discussion of Angel Investment Organizations, which are (in this story) nothing more than collections of experienced investors. Such investors have learned from experience that contracting terms are efficient, but each individual contract is too small to justify the investment of a lawyer. Pooled resources maximize the investors’ returns. This explanation could transition into a discussion of how the angel market, far from being thin and inefficient as some have posited, is actually a place for experienced investors to fleece newcomers by doing better in the business of insuring against downside risk.

The problem with this kind of story is that it makes it different to distinguish angels from <strike>devils</strike> venture-capitalists. Both groups seek to maximize profits: some simply don’t have enough at stake to accomplish their goals through contracts. So what makes an angel an "angel?" Footnote 1 suggests that the difference between VCs and Angels really boils down to VCs’ responsibilities to their investors to make a return. (Thus tying the paper nicely into the literature about the behavior changing effects of agency rules.) But this explanation doesn’t totally satisfy, because the evidence collected about angel behavior doesn’t seem to exclude corporate or merely middle-class angels. Ibrahim is careful to note that Angels would have difficulty making a claim of minority oppression in most courts. But I imagine that in other contexts, Angels might benefit from their names, and general reputations for benevolence. This suggests another reasons for angels to avoid legal controls: to preserve their general aura.

Overall, I thought this was a provocative, easy-to-read, and wonderfully stimulating paper. Ibrahim notes that much empirical research remains to be done about these secretive investors. Given some of his conclusions, I agree that a particularly ripe area of research (see page 16 of the paper) would employ a "more refined taxonomy of traditional angels." But additionally, it seems that many angels do employ traditional control mechanisms (20-42.5 percent seek a board seat; 60% seek preferred stock). Are such angels differently situated from other less protected members of the choir? Finally, I think that Ibrahim could tie the paper a bit more to the (Stout/Huang/Ribstein etc.) trust and contracting literature by employing some qualitative research. Is it really true, for example, that entrepreneurs would feel that proposed control terms create a trust-problem? Given the statistics offered about the demand for angels, I would have thought that an angel investment contract would be a bit like a ticket to a Bruce Springsteen concert. No one would read the flip side.

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