Angels and Demons: The Negative Effect of Employees' Angel Investments on Corporate Innovation

Abstract

A firm's economic value of patents decreases by 3.3% - 5% when its employees are investing their personal wealth in start-ups. We refer to such angel investors employed at public corporations as angel employees. We establish causality with matching and instrumental variable regressions, which rely on quasi-exogenous competition in the early-stage financing market. The negative relationship is stronger for angel employees in innovation-related roles, if the linked start-ups are more time consuming, and for exploratory patents. Start-ups financed by angel employees are more likely to successfully exit. Our results indicate that angel employees divert time and effort from their employers to their personal start-up investments. Overall, we highlight unexplored negative effects of angel investors in our economy.