Informal Venture Capital Market Research Articles

Business angels and early stage decision making criteria: empirical evidence from an emerging market

How do business angels assess a prospective entrepreneurial firm when they make an investment decision? This article examines a central question that informal venture capitalists have been struggling with for decades: What early stage decision making criteria do investors define and apply to reduce the volume of potential deals to a more manageable size? Based on semi-structured interviews with business angels in an emerging market, we show that investors are focused on the industry structure and product features, on the other side, our results also suggest a very strong support for the personality of the entrepreneur and management team. More specifically, entrepreneur trustworthiness is an essential element affecting an investor’s decision to close a deal. Business angels set requirements in terms of the entrepreneur’s equity stake in the start-up and monitoring tools to prevent the failure of investee firms. Our findings suggest that if there are warning signs that the project is in an existential crisis, most of the investors will reject their participation. We believe that our empirical results support both researchers and practitioners to establish a better understanding between the well-developed financial theories and the underresearched informal venture capital market in a Central and Eastern European country.

The informal venture capital market in developed countries and its features in Ukraine

The article investigates the characteristics of the functioning of the formal venture capital market in developed countries; the reasons that hinder the development of the informal venture capital market in Ukraine are defined and their effect on the specific features of its functioning are proved; the ways for the effective development of the informal venture capital market in Ukraine are proposed

Formalization of the informal venture capital market - Business angel networks and syndicates

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.

The returns of business angel investments and their major determinants

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.

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

This paper aims at providing evidence on the activity of business angels, using a unique dataset gathered during the five-year time period 2007-2011 with the support of IBAN (Italian Business Angels Network). In particular, the paper studies how characteristics of the investor and of the invested firm are correlated with returns, thus extending to the informal venture capital market research areas and methodologies widely applied in theoretical contributions dealing with the formal venture capital market. While, our descriptive analysis confirms the growing relevance of the relatively unknown and minimally regulated segment of the capital markets represented by the informal venture capital, given business angels’ capability to fill the equity funding gap between demand for financial resources by start-up companies and supply of early stage equity capital, the aim of the econometric analysis is to investigate the returns on business angels’ investments and their major determinants, making reference to an original set of independent variables (industry, exit strategy, experience, holding period, rejection rate, year of divestiture). Furthermore, while previous empirical studies hypothesized 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 major results achieved through the empirical analysis are the following: 1) differently from previous literature, the relationship between experience and IRR is non-linear and significant; 2) the widely accepted expectation that investments with a short holding period (below three years) earn a lower IRR is confirmed, for the first time, by quantitative data; 3) a new variable, rejection rate, is put into the model and its logarithmic impact on business angels’ performance is positive and significant. Finally, the outcomes of the empirical analysis performed in this study allow the identification of new and concrete insights into possible policy interventions aimed at stimulating the informal venture capital industry and, therefore, entrepreneurship inside the economic system.

The development of business angel networks in Latin American countries: the case of Chile

This article analyses the recent development of business angel networks (BANs) in Chile, in order to understand the limitations of the current public policies to encourage informal venture capital and especially the BANs. We describe the evolution of this policy and apply a semi-structured interview to managers of Chilean BANs. The poor results in total investments in the case of Chilean BANs allow us to understand how government programmes exclusively oriented towards the supply of the informal venture capital market are insufficient to promote the dynamism of this industry. It is necessary to implement articulated programmes both from the supply and demand side, accompanied by the continuous evaluation of their results.

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

This paper is aimed at identifying and analyzing the contribution of the major drivers of the performance of the business angels’ investments, thus extending to the informal venture capital market research areas and methodologies widely applied in the theoretical contributions dealing with formal venture capital market. Business angels, by investing in start-up companies who don’t have access neither to debt capital nor to equity capital subscribed by formal venture capitalists, are crucial in order to stimulate and support the entrepreneurial propensity inside an economic system, filling the equity funding gap.This study is the first attempt to present a wide picture of the Italian informal venture capital market, and analyzes data on Italian transactions and personal features of Italian Business Angels gathered during the five year time period 2007-2011 with the support of IBAN (Italian Business Angels Network). Our descriptive analysis shows that the Italian informal venture capital market grew significantly in the last decade and the number of operations is rising despite economic stagnation. Moreover, Italian Business Angels features are converging to those of Angels of more developed markets in terms of structural investment features, such as education, amount invested, yearly number of closed deals, exit strategy.The aim of the econometric analysis is to investigate the returns of business angels’ investments and their major determinants, making reference to an original set of independent variables (industry, exit strategy, experience, holding period, rejection rate, year of divestiture). Furthermore, while previous empirical studies hypothesize linear relationships between the explanatory variables and the performance of informal venture capitalists’ investments, this work tests different functional forms, linear and non linear ones as well. The major results achieved through the empirical analysis are the followings: 1) differently from previous literature, the relationship between Experience and IRR is quadratic and significant; 2) the widely accepted expectation that investments with short Holding period (below 3 years) earn a lower IRR is confirmed, for the first time, by quantitative data; 3) a new variable, Rejection rate, is put into the model and its logarithmic impact on IRR is positive and significant. Finally, the outcomes of the empirical analysis performed in this study allow to identify new and concrete insights on possible policy interventions aimed at stimulating the informal venture capital industry and, therefore, the entrepreneurship inside the economic system.

The Scale, Growth and Returns of Informal Venture Capitalists’ Investments in Italy

Start-ups need capital to make new investments, but they don’t have access to debt capital because of their inability to produce positive cash flows. The economic player who best suits seeds and start-ups financial needs is the Business Angel, a private investor who finance newly constituted firms with his own savings, filling the equity gap. Given the Italian economic structure based on SMEs, the presence of Business Angels is very important. This study is the first attempt to present a wide picture of the Italian informal venture capital market, and analyzes data on Italian transactions and personal features of Italian Business Angels gathered during 2007, 2008, 2009 and 2010 with the support of IBAN (Italian Business Angels Network). Our analysis shows that the Italian informal venture capital market grew significantly in the last decade (CAGR 2000-2010: 56%) and the number of operations is rising despite economic stagnation. Moreover, Italian Business Angels features are converging to those of Angels of more developed markets in terms of education, amount invested, number of yearly operations, exit strategy, etc. Furthermore, a regressive analysis on determinants of business angels returns has been performed, which shows that the exit strategy and the industry financed have a significant impact on the IRR of angels’ investments.

Venture capital informale e imprenditorialità

Two organized systems that are recently playing an important role in the organization of the informal venture capital market are angel groups and business intermediaries. While the former has grown fast in the US, the latter predominates in Europe. US angel groups are alliances made by investors providing a more efficient marketplace for innovative start ups. Business intermediaries are usually founded or supported by public organizations and mainly operate as a matching mechanism. The aim of this paper is to provide an analysis of the activities of these two organization forms. Building on this analysis, special attention is given to the Italian informal venture capital market, where angel groups still don’t emerge and business intermediaries are not really developing the market. Implications for public policy and a new mission for Italian business intermediaries are also discussed.

Unternehmensfinanzierung durch Business Angels

Corporate financing through business angels. Spatial organisation patterns of the informal venture capital market in Germany. Business angels play an important role in the financing of high-growth ventures. As informal investors they support entrepreneurs not only with money but also bring added value to their companies. The article examines the investment behaviour of business angels and traces the spatial diffusion of informal venture capital by considering different forms of proximity (spatial, organisational, cognitive, institutional and social). The findings are based on a large set of quantitative and qualitative empirical data collected from angel investors in Germany.Analysis of the data suggests interrelations between investment industries, social networks and the spatial mobility of informal venture capital. Altogether the spatial organisation of the business angel market in Germany can be described as an interregional network with financial and technology clusters as central nodes.

Public Policy Support for the Informal Venture Capital Market in Europe

The ability of small firms to access finance is hindered by persistent market failure, which creates funding gaps for new businesses, particularly in technology sectors, seeking small amounts of finance. This has prompted various forms of public sector intervention to increase the supply of both debt and risk finance. For the past decade (longer in the UK) both the EU and its member states have increasingly focused on the informal venture capital market as a means of increasing the supply of early stage venture capital. This article describes the changing nature of the forms of intervention and provides a critical review of their effectiveness. The lack of data on angel investing means that there is very little evidence on the impact of these forms of intervention. The article advocates that governments should invest in appropriate methodologies which can accurately measure investment trends in the early stage venture capital market, and specifically angel investment activity, so that the need for public sector intervention can be demonstrated and the impact of such interventions can be measured.

False expectations: Reconsidering the role of informal venture capital in closing the regional equity gap1

The role of informal venture capital in entrepreneurial process and economic development is increasingly recognized by scholars and policy-makers around the world. Much of the attention that this form of financing has received during the last couple of decades is due to its potential to bridge the regional equity gap. This study is concerned with regional distribution of informal venture capital and factors explaining the allocation of informal investments, and it is based on a large random sample of informal venture capital investors in Sweden. The key findings are that the informal venture capital market in Sweden shows a considerable concentration in metropolitan areas and university cities. Further, investments conducted in these places are allocated in proportion to the new business formation rate and concentration of technology-based firms, while the only factor that provides some explanation for the location of informal investments in the peripheral regions is the proportion of the regional population that is considering starting their own business. Finally, there is a small but significant reallocation of informal venture capital from peripheral regions to metropolitan areas and university cities, which shows that the informal venture capital market in Sweden contributes rather to sustaining the regional equity gap than to bridging it.

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

Capital problems are the most important to solve for almost all entrepreneurs, especially for those involved in activity of high level of innovation. The main solution which led to getting a mature innovative firm is a venture capital involvement in form of business angels, venture capital funds or seed funds. A cradle of venture capital market activity is the United States of America, but also in better developed countries in Europe such activity is also flourishing, e.g. in the United Kingdom, France, Germany, Scandinavian countries. In other EU countries, especially new members, venture capital market has not as yet been developed, but it is still growing together with the increase of the level of innovation and entrepreneurial activities. Filling up the capital gap in the very start of innovative companies such institutions as incubators, business angels and various kinds of advisors have played a key role. The main, complementary to each other, sources of early stage of venture projects are business angels (informal venture capital): high net worth individuals, senior managers from large companies, or serial entrepreneurs, who invest (on their own or in groups) a small proportion of their own wealth in SMEs, and venture capital firms (formal venture capital): firms which manage fixed life venture capital funds of banks, pension funds and financial institutions, and other investors (wealthy families, corporations). Together with development of business angel market and enforcing their significance as a source of entrepreneurship financing on start-up stage, and overall economy growth, business angel market has gone under some transformations, like a globalization of business angel conception, growing number of successful projects, of mentality in approach to entrepreneurship, and closing relations between venture capital funds and business angels. Informal venture capital market of business angels in Europe is much less developed than institutional one. The biggest number of business angels in Europe acts in three countries: the United Kingdom, France and Germany. Along an increase of a number of business angels and expanding an area of their activity single business angels lave been associated with business angel networks. The number of such networks in Europe systematically rises. In a half of 2005 there were 228 networks with 12 773 business angels in EU. Activity of business angels in Poland has been developed in fact slowly, but lately there is noticed a growth of interest from either entrepreneurs or capital owners. Undoubtedly an increase of business angels and business angel network activities has been caused by Poland access to EU. After 6 months of 2007, according to the data of European Business Angels Network – EBAN, there have acted three business angel networks in Poland, such as:PolBAN. Lewiatan Business Angels, and SilBAN. Together with putting more impact on innovations and possibility of financing such activity from EU funds the networks of business angels have sprouted all over the country.

On the structure of the informal venture capital market in Sweden: developing investment roles

This paper has two objectives: first, to estimate the size of informal venture capital market in Sweden, and second, to explore the heterogeneity of informal investing behaviour. Based on quantitative data on 278 informal venture capital investors and 422 investments, this paper provides an estimation of the size of the informal venture capital market in Sweden and an analysis of its structure by making a categorization of informal investors' investment roles. Four investment roles are identified based on the level of contribution of financial and human resources in the investment situation. The results show that the investment role that an individual assumes in the informal venture capital investment situation is dependent on the availability of the financial and human capital resources, as well as factors related to the willingness to supply them. The actual resource requirements of the firm have been shown to be of less importance in explaining the investment behaviour.

Business angels in a changing economy: The case of Sweden

The Swedish business angel market of 2004 is presented and compared to that of 1992 in order to determine the significance of the time factor. The presentation is carried out against the background of the macroeconomic changes that have taken place and how they have affected the informal venture capital market. The empirical findings reveal how the amounts invested have changed, which companies the business angels have invested in and the ways in which the business angels' deal flow has changed since 1992. The results show that business angels in Sweden have become more professional in their way of identifying new investment opportunities and that the informal venture capital market is becoming more mature with less information asymmetry. Furthermore, the results demonstrate that Internet hype and changes in the Swedish taxation system have probably influenced the business angel market, making investors invest at earlier stages and in high-tech companies.

The pre-investment behaviour of business angels: a social capital approach

Using insights from social capital theory, this paper examines the pre-investment behaviour of experienced business angels in Norway. Previous research indicates there are considerable inefficiencies in the informal venture capital market, notably information inefficiencies related to the identification of investment opportunities, and problems associated with the screening or evaluation of new investment proposals. The empirical findings show that an investor's previous track record, to a great extent, determines how they can operate in the informal venture capital market. It is quite rational for individuals who have acquired most of their experience in one specific region to make the overwhelming majority of their investments in the same region. It is this regional track record that gives them a competitive advantage in the informal venture capital market. This reasoning also seems to be valid with regard to individuals with industry specific experience, where the regional track record is ‘replaced’ by an industry specific record. Moreover, these industry specific investors take care of the initial screening themselves, whereas regional investors are predominately generalists who rely more on information provided by their regional networks. The business angels in this study are very concerned with establishing common ground with entrepreneurs and potential co-investors. This establishment of common ground can be viewed as a necessary antecedent for long-term trustworthy relationships.

The operation of the informal venture capital market in Scotland

This paper addresses the lack of knowledge about business angels based in Scotland. An understanding of the informal investment market is important given that Scotland has recently achieved devolved powers and business start-ups are a priority of the Scottish Executive. Based upon 140 replies to a survey questionnaire, investment-active angels are profiled in terms of business background and experience, motivation and investing criteria, behaviour and outcomes. Of particular note is the finding that the majority of angels based in Scotland lack experience of small businesses and it is argued that this cannot be helpful in securing deals with entrepreneurs. The paper addresses how entrepreneurs can target angels, the lack of ‘investable’ entrepreneurs, the role of experienced angels, how nascent angels can be encouraged to make their first investment, tax breaks and the search behaviour of angels. Finally, a typology of angels, based on the number of investments made by an individual, is set out.

Barriers to investment in the informal venture capital sector

Much of the government intervention into the market ‘gap’ for start-up and early-stage equity finance in the UK is based on the belief that the problem is on the supply side. Based on an analysis of the informal venture capital market this paper argues that there is no shortage of finance available. A survey of business angels reveals that many are willing to allocate a higher proportion of their investment portfolio to investments in unquoted companies, with recent tax incentives having a positive effect on their willingness to invest. Over 90% are currently looking to make more investments. However, there are constraints on their ability to invest: they do not see enough deals that meet their investment criteria, the majority of the investment proposals that they receive are of poor quality, and they are often unable to negotiate acceptable investment terms and conditions with entrepreneurs. The implication is that there is a need for further interventions by policy-makers to remove these barriers so that more small firms can take advantage of the substantial pool of angel finance that is available.

The Characteristics and Value-Added Contributions of Private Investors to Entrepreneurial Software Ventures

The nature and role of early stage equity financing in the development of emerging entrepreneurial ventures in the software industry is examined. To provide an understanding of the relationship between the suppliers of capital and the ventures they bankroll, issues concerning equity positions and holding periods are addressed. Given the unique position of private investors in the early stage equity market, particular attention is given to the characteristics of these investors and the investor characteristics germane to the software industry. Results for the software sector are compared with technology-based companies in an attempt to uncover any discernable differences between the two groups. The research hypothesizes that there are differences in the informal venture capital market among broadly defined sectors in terms of the sectors' technology and competitive conditions and their impact on: first, the need for, and timing of, external equity capital; and secondly, the characteristics and value-added contributions of the private investors attracted to the sector.

Informal investors - A categorization, with policy implications

A number of studies concerning informal investors have been carried out over the last two decades. One main conclusion from previous research has been that the informal venture capital market is very heterogeneous, and that classifications for informal investors are needed in order to more accurately depict the informal venture capital market. In this paper we propose that the market could be divided in accordance with the informal investors' investment activity and competence. The study is based on a sample of 425 active informal investors, divided into four different categories: (1) Lotto investors; (2) Traders; (3) Analytical investors; and (4) Business angels. The empirical findings show that there are considerable differences between the four categories of informal investors; differences regarding the information sources used, the level of firm involvement, co-investing, investment horizons, and geographic preferences, to name some examples. As a consequence, each of the various informal investor types responds differently to private and public prospects or motivators. It is suggested, therefore, that the informal venture capital market could be more effectively analysed and depicted by using the proposed classifications and applying differing measures to each informal investor category.