Business Angels in Poland in Comparison to Informal Venture Capital Market in European Union

DR. COLIN MASON IS SENIOR LECTURER IN economic geography at the University of Southampton, England, and Richard Harrison is professor of management development in the Ulster Business School, Northern Ireland. Research in a number of countries has established that informal venture capital is a major source of risk capital for entrepreneurial companies, substantially exceeding the size of the formal venture capital market. The informal venture capital market comprises individuals - commonly termed 'business angels' - who provide risk capital directly to entrepreneurial businesses. Demand for informal venture capital is increasing in Britain as a result of the tightening in lending to small businesses by banks and the shift of institutional venture capital funds even further away from start-up and early stage investments. This paper argues that there is considerable scope to expand the supply of informal venture capital. First, most active informal investors are unable to find sufficient investment oportunities. As a result, they have substantial uncommitted sums available for informal investments. Second, active investors represent only a fraction of self-made, high net worth individuals. The establishment of business introduction services can play a key role in enabling active investors to identify appropriate investment opportunities and also provide 'virgin angels' with a source of investment opportunities, thereby removing a major constraint to their participation in the informal venture capital market. However, business introduction services are still at the experimental stage and have had only a limited impact on the flow of informal venture capital. Key determinants in the success of business introduction services appear to be marketing effort to build a critical mass of investors and businesses, financial resources to allow ongoing marketing, and pro-active matching strategies.

In this paper, we shed light on interactions among the various investors operating within the entrepreneurial finance ecosystem. Specifically, we aim to investigate what business angel (BA) investment practices are correlated with follow‐on venture capital (VC) financing, and uncover the strategies that determine a complementary‐based or a substitution‐based relationship with VCs. We analysed a sample of 176 companies that received a BA investment during 2008–2016 and collected financial data over a 10‐year period after the BA investment. The data examined indicate that BAs’ selectivity, as measured by their rejection rate, and BAs’ affiliation to an angel network, are positively related with the probability of raising follow‐on VC financing. However, a high level of BAs’ monitoring activity negatively influences the probability of obtaining VC funding. Interestingly, BA networks do affect this relationship. The positive impact of BAs’ rejection rate is informative for VC decisions if the BA does not invest through a network. Conversely, a high level of monitoring may convey a negative signal for VC, particularly if the BA is affiliated to a network. These results extend our knowledge of the investment practices of BAs and their role in allowing angel‐backed companies to raise follow‐on VC financing.

Despite its undoubted importance to the financing of entrepreneurial ventures, there are few reliable measures of the size of the informal venture capital market. This paper reviews three methods used to generate such estimates – market-based approaches, firm-based approaches and the capture-recapture approach – and develops an alternative approach that is based on scaling up from the visible segment of this market represented by business angel networks. This methodology is applied to provide the first formal estimate of the size of the informal venture capital market in the United Kingdom. Informal venture capital investment is shown to broadly equate to the amount of institutional venture capital provided to start-up and early stage ventures. Reflecting the smaller average size of investments in the informal venture capital market, however, eight times as many businesses raise finance from business angels than from institutional venture capital funds.

There are two principal sources of venture capital for entrepreneurial companies. The institutional venture capital market, comprising professional venture capital firms, if the more familiar. However, despite its high profile it actually finances only a small number of businesses. Moreover, its investment focus favours larger, established businesses, including management buyouts, rather than new and recent start-ups. Much less visible - but considerably more significant as a source of finance for entrepreneurial companies - is the informal venture capital market comprising private investors (or ‘business angels’) who provide risk capital directly to new and growing companies. Drawing upon research undertaken in North America and Western Europe, this paper addresses three questions: (i) Who are business angels and how does the informal venture capital market function? (ii) Why is the informal venture capital market important to the development of an entrepreneurial economy? (iii) How can governments stimulate informal venture capital activity.

There is evidence from a number of countries that small firms encounter a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital industry has done little to fill this “equity gap” on account of its preference for making large investments in established companies and management/leveraged buyouts. Moreover, the supply of venture capital exhibits a high level of spatial concentration. Initiatives by state/provincial and local governments, most notably in economically lagging regions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costly, solution. A more appropriate approach to increasing the supply of start-up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market. Informal investors, or “business angels”, are private investors who provide risk capital directly to new and growing businesses in which they have no family connection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. There is also considerable scope for expanding the population of business angels. The most cost-effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market, namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.

Selecting the Functional Forms of the Determinants of the Performance of Business Angels’ Investments: An Empirical Analysis of the Italian Informal Venture Capital Market

The Impact and Functional Forms of the Major Determinants of Performance of Informal Venture Capitalistss Investments

Business angels are natural persons who provide equity financing for young enterprises and gain ownership in them. They are usually anonym investors and they operate in the background of the companies. Their important feature is that over the funding of the enterprises based on their business experiences they can contribute to the success of the companies with their special expertise and with strategic support. As a result of the asymmetric information between the angels and the companies their matching is difficult (Becsky-Nagy – Fazekas 2015), and the fact, that angel investors prefer anonymity makes it harder for entrepreneurs to obtain informal venture capital. The primary aim of the different type of business angel organizations and networks is to alleviate this matching process with intermediation between the two parties. The role of these organizations is increasing in the informal venture capital market compared to the individually operating angels. The recognition of their economic importance led many governments to support them. There were also public initiations that aimed the establishment of these intermediary organizations that led to the institutionalization of business angels. This study via the characterization of business angels focuses on the progress of these informational intermediaries and their ways of development with regards to the international trends and the current situation of Hungarian business angels and angel networks.

Business angel networks (BANs) provide a channel of communication between private venture capital investors (business angels) and entrepreneurs seeking risk capital. Most operate locally on a not-for-profit basis with their costs underwritten by the public sector. However, the recent establishment of BANs by private sector organisations in the U.K. has led to a questioning of the government's continuing role in the financing of BANs. This paper demonstrates that there are significant differences between public sector and other not-for-profit BANs and private sector, commercially-oriented BANs in terms of the investments that they facilitate. Private sector BANs are primarily involved with larger, later stage deals whereas investments made through not-for-profit BANs are generally smaller, involve start-ups and other early stage businesses and are local. The emergence of private sector BANs has therefore not eliminated the need for public sector support for locally-oriented networks.

Studies of venture capital rarely incorporate a time dimension. This is particularly true in the case of the informal venture capital market where the lack of statistical information has prevented any analysis of how this market has changed over time. This chapter addresses this omission by providing an overview of how the environment in the UK for business angels has changed over the past decade and the impact of these changes on investment activity. There have been significant changes in tax incentives, the regulatory environment and the institutional context. Specific consideration is given to the impact of the post-2000 technology downturn on angel investing. Finally, the chapter utilizes data on deals made through business angel networks (BANs) from 1993–2003 to indicate trends in investment activity. Three interrelated developments can be observed: the increasing proportion of large deals (more than £250,000); the decrease in large investments by individuals and the increase in smaller investments; and the increase in the number of syndicated investments involving large numbers of individual investors. These trends are, in turn, a function of the changing organization of the market, notably more business angel syndicates, more organizations offering “packaged” investment opportunities aimed at passive investors, and the remaining BANs operating more pro-actively to build ad hoc angel syndicates around specific deals.

Angels and non-angels: Are there differences?

The paper examines the issues of state and development of the informal venture capital (IVC) of Latvia. The results of a questionnaire survey of managers of business angels networks (BAN) are presented in the paper. The research analyses both quantitative and qualitative indicators of the IVC. The data on the IVC of Latvia were compared with the indicators and organisation of IVC in a number of the North European countries: size and number of formal and informal venture capital (VC) investments and advantages of investments by BAs and venture capital funds (VCF). The paper examines correlations between the IVC development level and the following indicators: the Summary Innovation Index, R&D expenditure, Doing Business, and the Global Venture Capital and Private Equity Country Attractiveness Index. The paper provides an estimate of the IVC potential of Latvia. The present research resulted in creating data on the performance of IVC investments in Latvia and it determined that Latvia has low qualitative and quantitative IVC indicators. The lack of any financial or organisational instruments of government support for the IVC industry is one of the reasons for low indicators in Latvia. The article provides recommendations for developing the IVC of Latvia.

Business angels are informal investors who collectively make-up the informal venture capital market (IVCM). Business angels represent the oldest and largest source of seed and start up equity capital for new entrepreneurial ventures in the US. An increasing role in the development of the US informal venture capital market is currently played by “angel groups”. These groups are increasing the professional level of the informal venture capital market as they establish and adopt clear routines and criteria for their operational activity. However, despite its importance and recent evolution, the informal venture capital market (both in US and in UK) is still far from be fully efficient. One of the most powerful 39 factors which fuels the inefficiency of the informal venture capital market is poor deal flow. Apart from the low quality of business plans, poor deal flow is fuelled by the fact that business angels do not see enough business plans that meet their investment criteria. The mismatch between the profile of investors and the nature of business plan lowers probability of matching between demand and supply and, in turn, fuels market inefficiency. Recent studies indicate that this mismatch is affecting not only individual investors but also angel groups. The present paper investigates the “mismatch problem” which affect US angel groups. Based on a content analysis of a sample of 28 US angel group Websites, the paper proposes an original framework which maps the main angel groups’ features by taking into account few behavioural dimensions. The output of a categorical principal component analysis is mapped on two dimensions that largely explain the main angel groups’ similarities and differences: the professional level, and the ethical mission of the angel groups’ members. One main implication for practice is that the map could be used as a useful tool for entrepreneurs looking for funding in order to meet the business angels’ investment criteria. In fact the map can help an entrepreneur to rapidly select the “right” angel group, taking into account a limited number of investors’ behavioural dimensions.

In Australia, as elsewhere, finding and acquiring equity capital is one of the major problems facing start-up or growing entrepreneurial ventures. The informal venture capital market, comprising high net worth non-institutional private equity investors (or 'business angels') provides risk capital directly to new and growing businesses and has been shown to be considerably more significant than institutional providers as a source of finance for entrepreneurial businesses. Building upon research undertaken internationally, this study generated and evaluated data resulting from an investigation of 36 carefully screened Australian business angels. It focused upon three primary research questions: (i) Who are Australia's informal venture capitalists (business angels)? (ii) How do they behave? (iii) What are their investment criteria? The study initiates Australian angel research into the developing international continuum of informal venture capital research and can serve as the generator of empirically testable hypotheses for future research and theory development.

Innovation is critical for firm and national competitiveness. However, financing innovation is increasingly difficult for early-stage, high-risk projects, as banks and venture capital firms are focusing on later-stage, less risky projects. To fill this gap, US and European entrepreneurs are turning for seed funding to Business Angels (BAs) and Business Angel Networks (BANs). We describe the role of BAs and BANs in the US and Europe from the perspectives of entrepreneurship theory and social network theory. We show how BANs can strengthen ties between entrepreneurs and individual investors under highly uncertain conditions. We also study the links between formal and informal private equity finance, raising wider questions about the funding and performance of clusters of innovation. Finally, we suggest that differences in network characteristics, rather than the availability of projects, explain the large differences in the size and performance of the BA sectors in the US and Europe.