In this article, we study the market for entrepreneurial finance and explain the coexistence of different financiers like Venture Capital (VC) and Angel investors. Our premise is that entrepreneur heterogeneity plays a major role in determining the structure of the market for entrepreneurial finance. We capture entrepreneur heterogeneity by assuming that entrepreneurs utility include motivational factors beyond that provided by value considerations.

In our model, the difference between VC and Angel investors is that VC investors acquire better information. It seems natural that VC investors, being better informed, will dominate the market and wipe out the less informed Angel investors. When we consider entrepreneur heterogeneity, however, the outcome is different, as Angel investors offer entrepreneurs an avenue to better capture their motivational factors.

Our model yields several empirical implications: 1. If entrepreneurs switch financiers, they will switch from Angel financing to VC financing. 2. On average, Angel-backed ventures are smaller, have higher ex-ante expected values, and are less likely to be liquidated compared to VC-backed ventures. 3. Industries with more attractive characteristics tend to have more Angel financing. 4. Boom periods are characterized by more Angel financing. 5. Locations with better entrepreneurial ecosystems exhibit more Angel financing.