Strategies for Expanding the Informal Venture Capital Market

Abstract

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.