The returns of business angel investments and their major determinants

Abstract

This paper provides evidence on the performance of business angels’ investments, using a unique data-set covering a representative sample of the main actors in the Italian informal venture capital market. An econometric analysis examines the returns on business angels’ investments and their major determinants, making reference to an original set of independent variables. Whereas previous empirical studies have hypothesised linear relationships between the explanatory variables and the performance of informal venture capitalists’ investments, this work tests different functional forms, both linear and non-linear. The main findings are as follows: (1) the relationship between experience and internal rate of return (IRR) is U-shaped and significant; (2) the widely accepted expectation that investments with a short holding period earn a lower IRR is confirmed by quantitative data; (3) an original explanatory variable – rejection rate – is put into the model and its impact on business angels’ performance is positive, non-linear and significant; (4) the final overall econometric model shows relevant explanatory power, with an R-squared close to 35%. The outcomes of the empirical analysis performed in this study allow the identification of new and concrete insights into possible public policy interventions aimed at stimulating the informal venture capital industry and, therefore, entrepreneurship inside the economic system.