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Perspectives on IPOs

Jonathan Ortmans, President, Public Forum Institute

Entrepreneurs making a decision about obtaining angel versus venture financing should consider a new research finding that there are substantial differences in how angel investors and venture capitalists approach initial public offerings (IPOs).

The Center for Venture Research at the University of New Hampshire (UNH) presented this finding in a working paper entitled "Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists.” Author Jeffrey Sohl explained: "Our results suggest that prior to making a decision about obtaining angel versus venture financing, private firm management should also consider the consequences of such early investors on IPO firm proceeds raised in an eventual IPO."

In particular, the new research suggests that venture capitalists are more likely to underprice IPO firms, thus reducing the proceeds to the firm from the offering, while angel investors have incentives more aligned with non-venture capital pre-IPO shareholders.

The research also revealed that IPO firms backed by both angels and venture capitalists are taken public sooner after founding, compared with non-backed firms. This suggests that both venture investors and angel investors have skill in picking good quality private firms to invest in.

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