From Founders to Funders: Generalized Reciprocity and Embeddedness in Founders’ Transition to Angel Investing

We examine how entrepreneurs transition to angel investing through the lens of generalized reciprocity and embeddedness. Using a multimethod approach combining archival analysis with three experiments, we reveal how psychological and social mechanisms shape this transition. We find that entrepreneurs who have received angel funding are more likely to become angel investors themselves, particularly when they share educational, professional, or geographic ties with their initial investors. While angel investors, like all investors, seek financial returns, we theorize that choosing angel investing over alternative investment vehicles reflects prosocial motivations rooted in reciprocity. Our mediation analyses demonstrate that gratitude, rather than reputation concerns, drives this initial transition. Furthermore, entrepreneurs who received embedded funding preferentially direct their investments toward entrepreneurs with whom they share embedded ties. This reveals a two-part process: emotional mechanisms drive the decision to become an angel investor, while structural embeddedness guides investment targeting. These findings integrate psychological accounts of generalized reciprocity with sociological perspectives on embeddedness, linking individual-level and structural explanations of prosocial behavior in economic contexts. Our study highlights how angel investing perpetuates itself through self-reinforcing cycles that create both opportunities and constraints for ecosystem development.