Organizational Decision-Making and Information: Angel Investments by Venture Capital Partners

We study information aggregation in organizational decision-making for the financing of entrepreneurial ventures. We introduce a formal model of voting where agents face costly tacit information to improve their decision quality. Equilibrium outcomes suggest a theoretical tension for group decision-making between the benefits of information aggregation and a cost from the participation of uninformed agents, and this tension presents a boundary condition for when a group decision is superior to an individual decision. We test the implications of the model for a particular phenomenon in venture capital: private angel investments by the partners outside of their employer, which represent investments passed on by the employer. Venture capital partners, acting independently with their personal funds, make investments into younger firms with less educated and younger founding teams than their employing VC firms, but these investments perform financially similarly or better on some metrics even when controlling for investment size, stage, and industry. Geographic distance and technological inexperience by the VC increase the probability the investment is taken up by a partner and not the VC. This work contributes to an emerging stream of literature on information aggregation in organizations and the established literatures on resource allocation and incumbent spin-outs.