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ENTREPRENEURSHIP & REGIONAL DEVELOPMENT, 14 (2002) , 271 ± 28 7

& REGIONAL DEVELOPMENT, 14 (2002) , 271 ± 28 7 Barrier s to investment in th

Barrier s to investment in th e informal venture capital sector 1

COLI N M. MASON *

Hunte r Centr e for Entrepreneurship , Universit y of Strathclyde , Leve l 14 , Livingston e Tower , Richmon d Street , Glasgo w G1 1XH , Scotland ; e-mail :

colin.mason @ strath.ac.uk

RICHAR D T. HARRISO N

Dixon s Chai r of Entrepreneurshi p and Innovation , Centr e fo r Entrepreneurshi p Research , Managemen t School , Universit y of Edinburgh , 7 Brist o Square , Edinburg h EH 8 9AL , Scotland ; e-mail :

Richard.Harrison @ ed.ac.uk

Much of th e governmen t intervention into the marke t ` gap ’ fo r start-up an d early-stag e equity

® nance in the UK is based on the belief that the problem is on the supply side. Based on an

analysi s of the informal venture capital market this paper argue s that there is no shortage of

® nance available . A survey of business angel s reveal s that man y ar e willing to allocat e a higher

proportion of their investment portfolio to investments in unquoted companies, wit h recent ta x incentives havin g a positive eÚ ect on their willingnes s to invest. Ove r 90 % ar e currently lookin g to mak e more investments. However , there ar e constraints on their abilit y to invest: they do no t se e enough deal s that meet their investment criteria, th e majority of th e investment proposals that they receive ar e of poo r quality, an d they ar e ofte n unable to negotiate acceptable invest- ment terms an d conditions wit h entrepreneurs. Th e implication is that there is a nee d for further interventions by policy-makers to remove these barriers so that more small ® rm s ca n take advantag e of the substantial poo l of ange l ® nance that is available .

Keywords: venture capital ; business angels ; investment potential; investment criteria; small ® rm s policy.

1. Introductio n

In recen t year s ther e ha s bee n muc h debat e in th e UK , as wel l as elsewher e in th e Europea n Union an d beyond , abou t th e availabilit y of ris k capita l for businesse s at thei r seed , start-u p an d earl y growt h stages . The popula r vie w is tha t ther e is a lac k of what migh t be terme d ` adventure ’ capita l becaus e mos t investor s ar e unwilling to inves t in ne w and recentl y starte d businesses , especiall y if the y ar e in technolog y sectors , becaus e of perceive d hig h risk s an d low returns . Thi s vie w underpin s th e thinkin g of policy-maker s an d is re¯ ecte d in a rang e of intervention s to increas e th e suppl y of early-stag e capital , suc h as th e Regiona l Ventur e Capita l Fund s initiativ e (Departmen t of Trad e an d Industr y 1999) , and ta x incentive s an d suppor t for busi - nes s ange l network s (service s tha t ` introduce ’ entrepreneur s to potentia l investors ) to expan d th e poo l of busines s angels . However , base d just on a consideratio n of th e ange l marke t plac e ± which represent s th e bigges t singl e sourc e of ® nanc e for

* Autho r for correspondence.

Entrepreneurshi p an d Regiona l Developmen t ISS N 0898 ± 562 6 print /ISS N 1464 ±511 4 onlin e # 200 2 Taylo r & Franci s Lt d http://www.tandf.co.uk/journals DOI : 10.1080 /0898562021014201 1

272

COLI N MASON AN D RICHAR D HARRISON

businesse s at thei r seed , start-u p an d early-growt h stage s (Maso n an d Harriso n 2000a )

± th e suppositio n tha t th e caus e of the ` equity gap ’ is on the suppl y sid e is contradicte d bot h by empirica l evidenc e (Maso n an d Harriso n 1994 , 1999 , Va n Osnabrugg e an d Robinso n 2000 ) an d by th e view s of informe d participant s in th e marketplace . For example , Davi d Grahame , Managin g Directo r of LIN C Scotland , a busines s ange l

network , ha s observe d tha t ` ther e ar e

® nd money , and ou r angel s ar e sayin g tha t the y ca n onl y plac e 10 % of wha t the y wan t

to invest ’ (Nicholso n 2000) . Thi s pape r addresse s thi s debate . It focuse s on busines s angel s ± tha t is , hig h ne t wort h individual s (mostl y self-made ) who inves t thei r ow n mone y in unliste d busi - nesses . Busines s angel s hav e becom e recognize d as th e mai n investor s in entrepreneur -

ia l companie s at thei r seed , start-u p an d earl y growt h stages . An analysi s of busines s

ange l network s in th e UK in 1999 ± 200 0 indicate s tha t 75% of investment s by busines s angel s involve d amount s of £ 10 0 00 0 or less , 59 % of thei r investment s were at th e seed , start-u p an d earl y stages , with a furthe r 33 % at th e expansio n stage , an d tha t the y mak e investment s acros s a wide rang e of industries , includin g technolog y ven- ture s tha t accounte d fo r 45 % of th e tota l (Maso n 2001) .

Ou r startin g poin t is to sugges t tha t ther e is no shortag e of ® nanc e tha t is available , or potentiall y available , from busines s angels . In th e UK it ha s bee n estimate d tha t ther e ar e betwee n 20 00 0 an d 40 00 0 busines s angel s who inves t betwee n £ 0. 5 bn an d

£ 1 bn pe r annu m in aroun d 3000 ± 600 0 businesse s (Maso n an d Harriso n 2000a) . As

note d above , mor e tha n hal f of thes e investment s ar e in businesse s at thei r seed , start - up an d earl y stage s of growth . To pu t thi s int o perspective , ventur e capita l fund s investe d in 118 2 businesse s in th e yea r 2000 , of which onl y 40 9 (35% ) were seed , start - up or earl y stag e (Britis h Ventur e Capita l Associatio n [BVCA] 2001) . 2 Moreover , th e suppl y of ® nanc e fro m busines s angel s coul d be signi ® cantl y expanded . First , mos t activ e busines s angel s ar e unabl e to inves t as frequentl y as the y woul d wish becaus e of

a lac k of suitabl e investmen t opportunitie s (Maso n an d Harriso n 1994 , 1999 , Van

Osnabrugg e an d Robinso n 2000) . Wetze l (1986 , 1987 ) interpret s thi s as a sig n of marke t ine Ý ciency. Second , ta x incentive s woul d promp t activ e investor s to seriousl y conside r allocatin g mor e of thei r investmen t portfoli o to the unquote d companie s secto r (Maso n an d Harriso n 1999 , 2000b) . Third , th e proportio n of the self-made , hig h ne t worth populatio n who ar e activ e busines s angel s coul d be substantiall y increase d with appropriat e form s of suppor t (Maso n an d Harriso n 1993) . For exam - ple , in th e US A potentia l investor s outnumbe r actua l investor s by a rati o of 3: 1

(Freear et al. 1994) . In short , ther e is a substantia l poo l of informa l ventur e capita l availabl e fo r investment ; however , it is no t bein g mobilize d eÚectively . The challeng e

fo r policy-maker s is therefor e to understan d th e barrier s tha t preven t thi s capita l fro m

bein g invested , an d to desig n appropriat e intervention s for thei r alleviatio n or removal. Wetze l (1986 , 1987 ) has argue d tha t the inabilit y of busines s angel s to mak e as man y investment s as the y woul d like is an informatio n proble m tha t arise s fro m th e largel y invisibl e natur e of th e participant s in th e informa l ventur e capita l market , which impede s th e ¯ ow of ® nanc e from investo r to entrepreneur . The eÚec t is tha t investor s lookin g fo r investmen t opportunitie s an d entrepreneur s seekin g investor s bot h experienc e hig h searc h costs . This, in turn , create s a discouragemen t eÚect , analogou s to th e discouragemen t eÚec t in labou r markets , amongs t bot h supplier s of an d seeker s for capital , encouragin g the m to dro p out of th e market . However , with publi c interventio n in th e marke t to suppor t th e developmen t busines s ange l

companie s ou t ther e sayin g tha t the y canno t

BARRIER S TO INVESTMENT IN TH E INFORMA L VENTUR E CAPITA L SECTO R

273

networks , which provid e channel s of communicatio n throug h which informatio n abou t opportunitie s fo r investmen t ca n be transmitte d betwee n entrepreneu r an d investor , thi s can no longe r be regarde d as a complet e explanation . Ove r the pas t 10 year s or so signi ® can t number s of busines s ange l network s (BANs ) hav e bee n forme d in th e UK an d als o in variou s othe r countries . However , fo r a signi ® can t proportio n of UK investors , membershi p of on e or mor e BA N ha s ha d littl e or no impac t on increasin g th e volum e of potentiall y investabl e opportunitie s tha t the y receiv e (Maso n an d Harriso n 1999) . Thus , ther e is a nee d to conside r a wider rang e of factor s tha t on th e on e han d preven t busines s angel s from investin g as frequentl y as the y woul d wish and , on th e othe r hand , preven t mor e entrepreneur s from accessin g th e substantia l poo l of ® nanc e tha t busines s angel s hav e availabl e to invest . The ai m of thi s pape r is therefor e to tak e a broade r perspectiv e on th e barrier s tha t busines s angel s encounte r in investing . First , we identif y th e siz e of th e poo l of uncommitte d busines s ange l ® nance . Second , we identif y th e ke y barrier s which imped e th e ¯ ow of thi s ® nanc e to ne w and earl y stag e ventures . Finally , we summariz e som e of th e implication s fo r th e developmen t of publi c policy .

2. Methodolog y

The inheren t di Ý cultie s involve d in identifyin g sample s of busines s angel s ar e well understood . Busines s angel s are an invisibl e populatio n who ar e no t liste d in an y directorie s an d ther e ar e no publi c record s of thei r transactions . Mos t studie s there - fore , of necessity , ar e base d eithe r on snowbal l surve y technique s or us e sample s of convenience . Moreover , th e stron g desir e of mos t busines s angel s for anonymit y (Benjami n an d Marguli s 2000 ) an d th e privat e and sensitiv e natur e of th e subjec t matte r (Haa r et al. 1988 ) generall y result s in lo w respons e rate s to posta l questionnair e survey s an d request s fo r interviews . Thus , an y samplin g approac h ha s multipl e source s of potentia l bias . However , as th e siz e and characteristic s of th e populatio n ar e unknow n an d probabl y unknowabl e (Wetze l 1983) , it is no t possibl e to asses s th e exten t of bia s in an y individua l sample . The pape r is base d on a posta l surve y of investor s registere d with th e Nationa l Busines s Angel s Networ k (NBAN) . 3 NBA N wa s forme d in 199 9 on th e initiativ e of th e Departmen t of Trad e an d Industr y an d is buil t upo n a numbe r of pre-existin g loca l an d regiona l busines s ange l network s with th e intentio n of signi ® cantl y enhan - cin g an d increasin g th e ¯ ow of investmen t opportunitie s to investors . Othe r aspect s of it s remi t ar e to hel p rais e awarenes s of th e rol e of busines s ange l ® nanc e an d encourag e mor e investmen t int o growt h businesses . NBA N is structure d as a federatio n of inde - penden t local / regiona l an d nationa l busines s ange l network s ± terme d special associ - ate s ± who ` pool ’ informatio n on thei r investmen t opportunitie s so tha t the y ar e availabl e to al l investor s acros s th e system . Thi s is achieve d by mean s of th e following services : (1 ) a ` BestMatch ’ service , a web sit e containin g searchabl e busines s oppor - tunities ; (2 ) a monthl y Bulletin , listin g ne w busines s opportunities ; and (3 ) regula r presentation s by businesse s to investor s at locall y hel d meetings . NBA N currentl y (April 2001 ) ha s 26 specia l associates . 4 Thes e compris e bot h commercially-oriente d network s ru n by privat e secto r organization s an d als o network s ru n eithe r by , or on behal f of , publi c secto r an d othe r not-for-pro ® t organization s engage d in busines s developmen t or regiona l development . In additio n to Departmen t of Trad e an d

274

COLI N MASON AN D RICHAR D HARRISON

Industr y (DTI) support , NBA N receive s sponsorshi p fro m severa l privat e secto r com - panies , mostl y in th e ® nancia l sector . Busines s angel s who ar e registere d with network s clearl y com e unde r th e categor y of

a sampl e of convenience . The attractio n of suc h investor s fo r researcher s is tha t by

joinin g a busines s ange l networ k the y hav e she d thei r cloa k of invisibility . Althoug h thei r name s an d addresse s ar e no t mad e public , som e network s hav e bee n willing to distribut e questionnaire s to thei r client s on behal f of researcher s on th e ground s tha t improve d informatio n on the marke t will enabl e the m to improv e thei r service . 5 However , it remain s unclea r whethe r busines s angel s who joi n busines s ange l network s

ar e in an y way distinctive . We hav e argue d elsewher e tha t an y risk of bia s is greates t if

a sampl e is draw n fro m a singl e busines s ange l networ k (Maso n an d Harriso n 1997) .

The importan t characteristi c of NBAN ’ s investo r databas e is tha t it include s th e client s

of a numbe r of busines s ange l network s throughou t Englan d an d Wales . We anticipat e

tha t thi s will hav e th e eÚ ec t of reducin g an y bias . 6 A tota l of 84 response s were receive d by th e deadlin e fo r thei r return . This repre - sent s a 20 % respons e rate . As othe r commentator s hav e note d (Haa r et al . 1988, Benjami n an d Marguli s 2000) , busines s angel s see k to safeguar d thei r privac y an d

so ar e likel y to be reluctan t to respon d to questionnaires , eve n anonymously . In thes e circumstances , the respons e rat e is quit e acceptable , particularl y when th e lengt h of

th e questionnair e is take n int o accoun t (1 2 pages , 46 questions) . 7 The majorit y of

investor s registere d with NBAN ar e privat e individual s ± i.e. busines s angel s ± an d other s representin g busines s ange l syndicates . However , som e professiona l intermedi - arie s (e.g . accountants) , non- ® nancia l corporation s engage d in corporat e venturin g

an d ventur e capita l fund s ar e als o registere d with NBAN . Jus t unde r 90 % of response s

were from busines s angels . Thi s pape r is base d onl y on th e response s of busines s angel s ( n = 74) . Amongs t th e busines s ange l respondents , 91 % wer e mal e an d 9% were female . This represent s a muc h highe r proportio n of wome n tha n in previou s survey s

of busines s angel s where th e mal e respons e wa s typicall y 99% . The regiona l distribu -

tio n of busines s ange l respondent s was weighte d toward s the sout h of Englan d (table 1).

Tabl e 1. Regional distribution of surve y respondents.

Region

Number of respondents

%

London South East Eastern South West East Midlands Wes t Midlands North West Yorkshire an d Th e Humber North East Wales Scotland Northern Ireland Overseas No information Total

22

32.8

8

11.9

6

9.0

12

17.9

3

4.5

6

9.0

3

4.5

4

6.0

0

0

1

1.5

1

1.5

0

0

1

1.5

(7)

74

100

BARRIER S TO INVESTMENT IN TH E INFORMA L VENTUR E CAPITA L SECTO R

3. Investmen t potentia l

3. 1 Incom e an d ne t wort h

275

Mos t busines s angel s hav e a high ne t worth an d signi ®can t income . Jus t unde r three - quarter s (71% ) of respondent s to ou r surve y hav e a ne t wort h (excludin g principa l residence ) in exces s of £ 50 0 000 , with millionaire s comprisin g 62 % of al l respondents . In term s of income , 12 % had £ 25 0 00 0 or more , 43 % were in th e £ 10 0 000 ± £ 24 9 00 0 rang e with a furthe r 39 % in the £ 50 000 ± £ 99 00 0 range . However , wherea s wealth is

a necessar y conditio n fo r someon e to becom e a busines s angel , in mos t case s it is no t

su Ý cient. The sourc e of wealt h is als o signi ® cant . Busines s angel s ar e muc h mor e likel y to hav e achieve d thei r wealth y statu s throug h thei r ow n eÚorts , as oppose d to havin g

inherite d it (i.e . ® rs t generatio n money ) and , in particular , hav e achieve d thei r wealth throug h entrepreneuria l activit y rathe r tha n in a hig h incom e occupation . 8 This is re¯ ecte d in thi s study : 71 % of ou r respondent s ha d founde d one or mor e businesses ; on averag e th e respondent s ha d starte d two businesse s an d 9% of respondent s had founde d ® ve or mor e businesses . Thus , as previou s researc h ha s suggested , on e of

th e ver y few sustainabl e generalization s tha t ca n be mad e abou t busines s angels ,

who in mos t othe r respect s ar e a ver y heterogeneou s population , is tha t the y ar e

typicall y successfu l cashed-ou t entrepreneurs .

3. 2 Motive s fo r investin g

Busines s angel s inves t in unliste d companie s predominantl y for ® nancia l reason s (tabl e 2) . By fa r th e mos t importan t reaso n is ` th e potentia l fo r high capita l appreciation ’ , with current /futur e incom e ranke d third . However , con ®rmin g previou s research , non- ® nancia l motive s emerg e as a ver y stron g secondar y consideratio n fo r becomin g

a busines s angel . Indeed , ` persona l satisfactio n fro m bein g involve d with entrepre -

neuria l businesses ’ is th e secon d mos t importan t reaso n fo r investing . Anothe r signi ®- can t non- ® nancia l reaso n for investin g in unliste d companie s is ` a way of havin g fun with my money ’ . For mos t of thes e busines s angel s there is no trade-o Ú betwee n

Tabl e 2. Motives fo r investing.

Motive

Percentage of respondents

Ver y important

Quite important

No t important

To support th e next generation of entrepreneurs

9

36

55

Personal satisfaction from being involve d with

53

36

11

entrepreneurial businesses Potential fo r high capita l appreciation

72

24

4

To help a friend/ friends se t up in business

3

10

87

Fo

r current or future income , e.g. dividends, fees

41

32

27

Support sociall y bene® cial products or services

5

10

85

A

way of having fu n with som e of my mone y

14

46

40

Fo

r positiv e recognition in th e community

1

3

96

Fo

r non-® nancial perks, privileges an d bene® ts

1

8

91

To mak e use of tax breaks , e.g. Enterprise Investmen t Scheme

19

41

41

276

COLI N MASON AN D RICHAR D HARRISON

® nancia l an d non- ® nancia l motives : it is a both / an d rathe r tha n an either / or choice . Signi ® can t secondar y consideration s fo r investin g includ e ` to mak e us e of ta x breaks ’ an d ` th e desir e to suppor t th e next generatio n of entrepreneurs ’ . However , in othe r respect s busines s angel s ar e no t motivate d by altruisti c concerns , with 85 % statin g tha t th e suppor t of sociall y usefu l product s an d service s is not a reaso n for investing . As othe r researc h ha s suggeste d (Barke r 1999) , mos t busines s angel s regar d thei r invest - men t activit y as totall y separat e fro m thei r philanthropi c activities . Finally , mos t busines s angel s do no t inves t to receiv e persona l recognitio n in th e community :

respondent s were almos t unanimou s in statin g tha t thi s is no t a consideration . Busines s ange l investmen t is , therefore , primaril y an economi c phenomenon , under - take n by investor s in th e expectatio n of signi ® can t returns . However , th e secondar y importanc e of a desir e fo r involvemen t in the entrepreneuria l proces s emphasize s tha t busines s ange l investor s brin g mor e tha n mone y to th e deal , and see k to contribut e thei r experienc e an d knowledg e to thei r investments . Indeed , 94% of respondent s describ e themselve s as hands-o n investor s who brin g a wide rang e of experienc e in term s of functiona l expertise , lengt h of senio r managemen t or professiona l experienc e an d industr y knowledg e to thei r investe e businesses .

3. 3 Investmen t activity : actua l an d potentia l

Of th e 74 busines s angel s who responded , 52 (70% ) had mad e investment s in th e 3 year s prior to the survey . Thes e investor s ha d collectivel y investe d £12.2 5 million in 11 8 businesses . 9 Assumin g tha t th e investo r characteristic s of th e sampl e ar e repre - sentative , thi s translate s int o an estimat e of aroun d £ 60 millio n investe d in ove r 60 0 businesse s by NBA N investor s in th e 3 year s prio r to th e survey . Fo r mos t busines s angel s thes e investment s represente d onl y a relativel y smal l proportio n of thei r invest - men t portfolio , typicall y betwee n 5 an d 10% . The remainde r of thei r portfoli o is investe d in th e stoc k marke t (93 % of investors) , propert y (62% ) an d banks / buildin g societie s (57% ) and , to a lesse r extent , bond s (49% ) an d gilt s (36%) . Relativel y fe w busines s angel s inves t in art / antiques , collectible s or othe r mor e esoteri c categorie s (tabl e 3) , con ® rmin g tha t the y ar e ` investment ’ rathe r tha n ` consumption ’ investors .

Table 3. Investmen t portfolios of business angels.

Asset class

Percentag e of respondents investing in this asse t class (% )

Stoc k marke t (including unit trusts, investment trusts )

93

Property (othe r tha n principal residence)

62

Bank / building society

57

Bonds

49

Gilts

36

Art/antiques

31

Collectibles: e.g. coins/ stamps , vintag e cars, etc.

12

Fine wines

12

Racehorses

4

Other

7

BARRIER S TO INVESTMENT IN TH E INFORMA L VENTUR E CAPITA L SECTO R

277

Table 4. Maximu m proportion of portfolio that business angels ar e willing to invest in unlisted companies.

Percentag e of portfolio

Percentag e of respondents

Less than 5% 5± 9 10± 14 15± 19 20± 24 25± 29 30% and over

2

3

23

3

23

10

36

However , man y busines s angel s ar e prepare d to allocat e a highe r proportio n of thei r investmen t portfoli o to investment s in unliste d companie s (media n = 20% ) (tabl e 4) . The factor s tha t in¯ uenc e th e proportio n of thei r portfoli o tha t busines s angel s inves t in unliste d companie s appear s to be largel y determine d by persona l rathe r tha n environmenta l considerations . As tabl e 5 shows , th e ta x regim e and , to a lesse r extent , economi c growt h ar e th e onl y economi c factor s tha t hav e a signi ® can t in¯ u- enc e on ho w mos t busines s angel s mak e thei r investmen t portfoli o allocatio n decision

Tabl e 5. Rol e of economic conditions in in¯ uencin g th e proportion of thei r investment portfolio that business angels allocate to investment s in unlisted companies.

Percentage of respondents

Discouraging

investment

Encouraging

investment

Economic condition

A lot

A little

No in¯ uence on investment

A little

A lo t

Rising interest rate s Stable/ falling interest rate s Rising stoc k marke t Stable/ falling stoc k marke t High in¯ ation Low in¯ ation Higher capita l gain s ta x Lowe r capital gain s tax Property prices rising abov e th e rat e of in¯ ation Static /falling property prices Increasing economic growt h Stable/ decreasing economi c growt h Higher ta x on dividends Lowe r tax on dividends Income ta x relief on amount s invested in unquoted companies Continued presence of Alternative Investmen t Marke t [AIM] Absence of Alternative Investmen t Marke t [AIM]

9

27

55

3

6

0

3

61

18

18

0

15

57

15

13

0

17

68

8

8

7

14

65

9

5

2

5

72

6

16

30

21

41

2

6

2

3

43

26

26

0

8

78

6

6

2

8

77

8

6

2

0

36

36

26

5

25

60

6

5

27

16

47

9

2

0

5

52

20

23

3

0

23

31

43

3

0

68

17

12

9

14

74

3

0

278

COLI N MASON AN D RICHAR D HARRISON

an d speci ® call y on th e proportio n of thei r portfoli o tha t is investe d in unliste d busi - nesses . Highe r rate s of capita l gain s ta x an d highe r tax on dividen d income s woul d eac h discourag e hal f of th e respondent s fro m investin g in unliste d companies . Conversely , reducin g the rat e of capita l gain s tax woul d encourag e 52 % of investor s to inves t mor e (26 % woul d be encourage d ` a lot ’ ) while reducin g ta x on dividend s woul d encourag e 43 % of investor s to inves t mor e in unliste d companies . A tota l of 74 % of busines s angel s woul d be encourage d to inves t mor e (43 % ` a lo t more ’ ) by front-en d ta x reliefs. This emphasi s on tax is consisten t with th e earlie r evidenc e on motive s fo r investing , which note d tha t makin g us e of ta x break s is an importan t reaso n fo r makin g investments . Indeed , 38% of th e investment s mad e by respondent s use d the Enterpris e Investmen t Scheme . 10 It als o suggest s tha t the recen t introductio n of a capita l gain s ta x tape r ± which reduce s th e rat e of capita l gain s ta x for highe r rat e taxpayer s to jus t 10 % afte r an asse t ha s bee n hel d fo r 2 year s ± shoul d hav e th e eÚect of increasin g th e amoun t of ® nanc e tha t busines s angel s ar e willing to inves t in unliste d companies . In contrast , mor e tha n hal f of al l respondent s ar e no t in¯ uenced by interes t rates , stoc k marke t trend s or th e rat e of in¯ ation , an d les s tha n one-quarte r of investor s ar e in¯ uence d by propert y prices .

3. 4 Tim e constraint s

The proces s of investin g involve s considerabl e time : ther e is a nee d to identif y poten - tia l investmen t opportunities ; onc e identi ® ed , th e proces s of assessing , structurin g an d negotiatin g th e investmen t ca n be lengthy ; an d havin g invested , mos t busines s angel s the n devot e signi ® cant amount s of tim e to supportin g thei r investe e businesses . Respondent s to thi s surve y wor k an averag e of 6 day s pe r mont h in eac h of thei r portfoli o companies . Moreover , fo r mos t busines s angels , investin g is a part-tim e activity . Thus , while busines s angel s may hav e additiona l capita l available , the y ma y no t hav e su Ý cien t tim e to add to thei r existin g portfoli o of investment s in unquote d companies . Indeed , previou s studie s hav e con ® rme d tha t th e lac k of tim e to searc h fo r an d evaluat e investmen t opportunitie s ar e signi ® can t barrier s to invest - men t (Maso n an d Harriso n 1999) . In thi s surve y mor e tha n one-hal f (57% ) of th e respondent s con ® rme d tha t ther e is an uppe r limit to th e numbe r of investment s in thei r portfoli o tha t the y ar e capabl e of managin g eÚectively . The averag e maximu m portfoli o siz e is ® ve investment s bu t on e in te n investor s gav e a limit of mor e tha n 10 investments . The ke y constraint s are , ®rst , insu Ý cien t tim e to monito r th e per - formanc e of additiona l investment s (45% ) and , second , th e tim e availabl e to play a hands-o n rol e (45%) . However , th e vas t majorit y of busines s angel s in thi s surve y reporte d tha t the y hav e no t reache d th e limit of thei r investmen t capacity .

3.5 Summary

This sectio n ha s establishe d tha t busines s angel s do hav e potentia l untappe d capita l tha t is availabl e for investmen t in unquote d companies . They ar e willing to allocat e a highe r proportio n of thei r investmen t portfolio s to suc h investment s an d hav e th e tim e availabl e to searc h for an d manag e additiona l investments . Recent change s to th e ta x regim e ± som e of which were announce d afte r th e surve y was undertake n ± see m likely to reinforc e thei r willingnes s to increas e thei r investment s in unquote d companies .

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Table 6. Amount that business angels have available for investment.

Amount

Percentage of respondents

<

£ 25 000

7

£25 000 ± 49 00 0

2

£50 000 ± 99 00 0

18

£10 0 000 ± 24 9 00 0

43

£25 0 000 ± 49 9 00 0

15

£50 0 000 ± 99 9 00 0

10

> £ 1 million

4

Indeed , mor e tha n 90 % of respondent s ar e currentl y lookin g to mak e furthe r invest - ments . The amount s tha t the y hav e availabl e to inves t rang e fro m aroun d £ 10 00 0 to ove r £1 million , with an averag e of £10 0 00 0 (tabl e 6) an d in aggregat e term s is ver y signi ® cant , exceedin g th e amoun t tha t the y hav e collectivel y investe d in th e 3 year s

prio r to th e survey . Extrapolatin g fro m thi s sampl e to th e populatio n of ange l investor s registere d with NBAN , thi s suggest s tha t NBA N member s hav e aroun d £ 70 millio n availabl e fo r investment . If busines s angel s ar e unabl e to inves t thi s mone y in unliste d companie s it will be redirecte d predominantl y to th e Stoc k Market , bank s an d build - in g societie s an d property . The remainde r of thi s pape r therefor e consider s whethe r busines s angel s encounte r barrier s to investin g in unliste d companie s and , if so, what

for m the y tak e an d ho w the y migh t be overcome .

4. Barrier s to investmen t

A usefu l way in which to structur e thi s discussio n of potentia l barrier s to investmen t

fo r busines s angel s is in term s of th e thre e ke y stage s in th e investmen t decision-makin g

process : screening , evaluatio n an d negotiatio n (Maso n an d Roger s 1997, Feene y et al.

1999) . The ® rs t aspec t is th e busines s angel ’ s investmen t criteria . The ® rs t reactio n of busines s angel s when screenin g an investmen t opportunit y is to conside r th e exten t of

th e ` ® t’ with thei r ow n persona l investmen t criteri a (Maso n an d Roger s 1997) . Havin g

establishe d tha t an opportunit y satis ® es thei r persona l investmen t criteri a angel s the n

go on to evaluat e its intrinsi c merits . The ® na l stag e in the investmen t proces s is th e negotiatio n ove r th e term s an d condition s of th e investment .

4. 1 Investmen t criteri a

Nearl y two-third s (64% ) of respondent s hav e clearl y de ® ne d investmen t criteri a which in¯ uenc e th e type s of businesse s tha t the y will conside r investin g in. Thes e criteri a includ e stag e of busines s development , industry , technolog y an d location . The busines s angel s in thi s stud y ar e primaril y intereste d in investin g in establishe d companie s seekin g expansio n ® nancing , earl y stag e expansio n an d to a muc h lesse r exten t start-u p ® nancing . Onl y a smal l minorit y of busines s angel s ar e intereste d in investin g at th e see d stage . A signi ®can t proportio n ar e also intereste d in investin g in managemen t buyout s an d buy-in s (tabl e 7) .

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COLI N MASON AN D RICHAR D HARRISON

Tabl e 7. Investmen t preference s of business angels: stag e of business development.

Percentage of respondents

 

No

Moderate

Very strong

Stage

interest

interest

interest

Seed (pre-start-up ) ® nancing

26

30

30

9

6

Start-u p ® nancing

7

29

29

17

19

Early stag e expansio n ® nancing

1

7

21

36

34

Expansion ® nancing fo r established ® rms

7

16

11

30

36

Rescue ® nancing

41

19

16

13

12

Managemen t buy-out s

21

11

22

24

22

Managemen t buy-in s

20

10

24

24

22

Mos t of th e surve y respondent s also impos e restriction s on the industrie s tha t the y will inves t in . In respons e to an ope n questio n on industrie s tha t the y were particularl y intereste d in investin g in , or woul d no t conside r investin g in , positiv e response s out - numbere d negativ e responses . This challenge s th e conventiona l wisdo m tha t busines s angel s ar e bette r abl e to articulat e what the y woul d not inves t in , rathe r tha n wha t they would conside r investin g in . The industr y preference s were generall y articulate d in ver y precis e term s rathe r tha n in term s of broa d industr y sectors . Moreover , th e preference s were extremel y varied . Fo r example , fo r ever y investo r who state d an interes t in investin g in traditiona l manufacturin g or engineerin g businesse s ther e was anothe r who woul d no t conside r investin g in thes e sectors . Similarly , som e angel s ar e avers e to investin g in technolog y sector s whereas other s tak e th e opposit e view . Mor e tha n 4 ou t of 10 investor s expresse d a stron g or ver y stron g interes t in internet , IT an d telecom s businesses ; interes t in multimedi a an d biotechnolog y wa s less stron g (tabl e 8) . Thes e industr y preference s re¯ ec t th e fac t tha t busines s angel s generall y inves t in sectors , market s or technologie s wher e the y hav e som e degre e of familiarit y or direc t experienc e (Kell y an d Ha y 1996) . Mor e tha n 6 ou t of 10 investor s sa y tha t thei r abilit y to inves t is limite d by thei r lac k of knowledg e of particula r industries , technol - ogie s an d markets . Indeed , busines s angel s rejec t an averag e of 80 % of th e investmen t proposal s tha t the y receiv e fo r thi s reason . Ove r one-hal f (55% ) of al l busines s angel s als o hav e a geographica l limit beyon d which the y will no t conside r investing . Fo r th e majorit y of thes e investor s (67% ) th e

Tabl e 8. Interest of business angels in technology sectors .

Percentage of respondents

 

No

Moderate

Very strong

Sector

interest

interest

interest

Internet/e-commerce

20

14

20

19

27

IT (information technology )

19

10

24

18

29

Biotechnology

32

20

23

11

14

Telecommunications

16

11

31

20

22

Multi-media

26

13

33

11

17

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Tabl e 9. Situations when business angels are prepare d to rela x their investmen t criteria .

Situation

Percentag e of respondents

None : never invest outsid e of investment criteria

11

High credibility of entrepreneur/ managemen t tea m

53

Smal l investmen t required

31

Locatio n of business very clos e to home / workplace

31

Recommendation from truste d sourc e

30

Prospec t of ver y high returns

27

Intuition/ gu t feeling

27

Availability of co-investor / syndicat e

22

Convincing presentation by entrepreneur

20

Referral from a business ange l network

10

To diversify my portfolio of business ange l investments

7

Opportunity to syndicat e with othe r investor s

5

Respondent s coul d cit e mor e tha n on e category .

limit is 2 hour s travellin g time . Moreover , ver y few investor s ar e intereste d in investin g in continenta l Europ e (10% ) or Nort h Americ a (4%) . However , we kno w fro m anecdota l evidenc e tha t busines s angels ’ investmen t prefer - ence s ar e no t necessaril y a goo d guid e to thei r actua l investments . Indeed , mos t of th e busines s angel s in thi s stud y indicate d tha t the y will conside r relaxin g thei r investmen t criteri a in certai n circumstances , notabl y where th e entrepreneur /managemen t tea m ha s hig h credibilit y (tabl e 9) , con ® rmin g othe r evidenc e tha t angel s plac e muc h greate r weigh t on th e ` jockey ’ tha n on th e ` horse ’ (Fie t 1995a , b, Va n Osnabrugg e an d Robinso n 2000 , Harriso n an d Maso n 2002) . Investor s will als o be mor e likely to inves t if th e referra l is recommende d by a truste d sourc e (Harriso n et al. 1997) . Othe r factor s tha t encourag e som e investor s to rela x thei r investmen t criteri a ar e th e locatio n of th e busines s clos e to th e investor ’ s hom e ± which ha s th e eÚec t of reducin g transactio n an d monitorin g cost s ± an d a smal l dea l siz e ± whic h ma y encourag e a speculativ e investment.

4. 2 Quality of investmen t opportunitie s

The qualit y of dea l ¯ ow tha t busines s angel s se e is a furthe r signi ® can t barrie r to investment . In thi s survey , 81 % of respondent s indicate d tha t thei r abilit y to inves t is limite d by th e qualit y of th e opportunitie s tha t the y see . Accordin g to th e angel s themselves , th e mai n de ® ciencie s in th e proposal s tha t the y se e ar e busines s plan s which contai n unrealisti c assumption s or informatio n tha t is no t credibl e and , second , th e entrepreneur / managemen t tea m lacks credibility . Signi ® cant , althoug h les s fre - quentl y cited , weaknesse s includ e insuÝ cien t informatio n provided , busines s concep t require s furthe r developmen t an d limite d growt h prospect s of th e busines s (tabl e 10) . This is consisten t with th e few othe r studie s to hav e examine d th e investmen t decision - makin g proces s of busines s angel s (Maso n an d Harriso n 1996a , Maso n an d Roger s 1997 , Feene y et al. 1999). The deal ¯ ow tha t busines s angel s receive come s fro m a variet y of forma l an d informa l sources . Fo r thi s grou p of investor s ± al l registere d with NBA N ± it is no t

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COLI N MASON AN D RICHAR D HARRISON

Table 10 . De ® ciencies in investmen t opportunities.

Percentag e of respondents

Found in most ( > 75%) of opportunities

Found in many (50%± 75%) of opportunities

Assumptions unrealistic/ information lack s credibility

43

27

Entrepreneur/ managemen t team lack s credibility

42

26

InsuÝ cient information provided

31

31

Business concept needs further development

24

24

Growth prospects of business is limited

23

26

No obviou s exit route

20

30

Lac k of originality in product/ service

20

22

Lac k of long ter m visio n fo r business

20

16

Business under-capitalized/ lacks liquidity

19

23

InsuÝ cient commitment displayed by entrepreneur

12

22

Lac k of integrity of th e entrepreneur

10

15

Othe r de® ciencies

1

1

Table 11 . Source s of information on investmen t opportunities.

Information source

Percentag e of respondents

NBAN

66

Business associate s

50

Other business ange l networks

42

Friends

40

Media: magazines , newspapers, etc.

38

Active personal searc h

37

Accountants

32

Contacte d by entrepreneurs seeking ® nance

22

Venture capita l funds

18

Lawyers

16

Banks

14

Family

12

Stockbrokers

12

Other source s

5

Respondent s coul d giv e mor e tha n on e source .

surprisin g tha t NBAN is th e mos t commo n sourc e of informatio n on investmen t opportunities , with othe r busines s ange l network s (presumabl y network s tha t ar e loca l associate s of NBAN ) also ® gurin g prominentl y (tabl e 11) . However , th e othe r signi ® can t source s of dea l ¯ ow ar e informa l ± busines s associates , friends , medi a an d persona l search . By contrast , relativel y few busines s angel s obtai n informatio n on investmen t opportunitie s fro m forma l source s suc h as accountants , lawyers , ventur e capita l funds , banks , an d stockbrokers . This re¯ ects the ad hoc , unscienti ® c way in which busines s angel s searc h fo r investmen t opportunitie s (Wetze l 1981 , Maso n an d Harriso n 1994) . Informa l source s (friends , busines s associates , othe r busines s angels ) als o attracte d the greates t suppor t as th e referra l source s tha t provid e th e bes t qualit y of investmen t opportunities , con ® rmin g earlie r US ® nding s (Freea r et al. 1992).

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Table 12 . Reason s why term s an d conditions of an investment coul d no t be agreed .

Reason

Percentag e of respondents

Coul d not agre e on price

50

Coul d not agre e on shareholding structure

44

Coul d not agre e on th e compositio n an d power of th e Boar d of Directors

18

Coul d not agre e investor ’ s hands-o n contribution to th e business

15

Coul d not agre e on exit strateg y

9

Coul d not agre e on remuneration issues

6

Coul d not agre e on investor’ s right of vet o

3

Coul d not agre e on investor’ s right to information

0

Other

21

Base d on response s fro m 34 investor s wh o had faile d to agre e term s an d condition s wit h an entrepreneu r on at leas t on e

occasio n in th e previou s 3 years .

4. 3 Failur e to negotiat e

A ® na l reaso n why busines s angel s do no t inves t as frequentl y as the y woul d like is tha t

the y fai l to negotiat e a dea l with th e entrepreneu r tha t is acceptabl e to bot h sides . Thi s occur s surprisingl y often . Indeed , a previou s stud y note d tha t busines s angel s mad e fou r time s as man y oÚ er s to inves t as were accepte d (Maso n and Harriso n 1996b) . In thi s surve y 53 % of respondent s indicate d tha t ther e ha d bee n occasion s in th e 3 year s prio r to th e surve y ± in mos t case s jus t on e or two ± when the y ha d wante d to inves t

bu t ha d faile d to agre e on th e term s an d condition s of th e investment . By fa r th e mai n

reason s why the investmen t was not mad e was becaus e th e ange l an d entrepreneu r coul d no t agre e on eithe r th e pric e or th e shareholdin g structur e (tabl e 12) . This ma y re¯ ect unrealisti c expectation s on th e par t of on e or other , or both , parties .

5. Conclusion s

The stud y underline s th e signi ® canc e of th e informa l ventur e capita l marke t as a sourc e of ® nanc e fo r unliste d companies . Busines s angel s registere d with NBA N hav e mad e an estimate d 60 0 + investment s involvin g an investmen t of som e £ 60 millio n in th e 3 year s prio r to th e survey . As mos t busines s angel s do no t registe r

with busines s ange l network s thi s scal e of investmen t activit y represent s jus t th e ti p of

th e iceberg . Furthermore , thei r investmen t potentia l is enormous : busines s angel s

registere d with NBA N hav e an estimate d £ 70 millio n availabl e fo r investmen t in

unliste d companie s an d th e averag e busines s ange l is willing to doubl e th e proportio n

of his / he r investmen t portfoli o tha t is currentl y allocate d to unliste d companies . The

governmen t ca n tak e som e of the credi t fo r helpin g to creat e thi s poo l of ® nance . Busines s angel s ar e highl y sensitiv e to th e ta x regime , an d th e willingnes s of activ e investor s to increas e th e proportio n of thei r investmen t portfoli o tha t the y allocat e to investment s in unliste d companie s ca n be attributed , in part , to th e eÚect of ta x incentive s suc h as th e Enterpris e Allowance Schem e an d th e Capita l Gain s Tax taper . Thes e initiative s ma y als o be expecte d to hav e encourage d othe r high ne t wort h self-mad e individual s to becom e busines s angels . However , ther e ar e signi ®can t constraint s on th e abilit y of busines s angel s to inves t as frequentl y as the y woul d wish, or as muc h as the y woul d wish: 11

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COLI N MASON AN D RICHAR D HARRISON

.

busines s angel s do no t se e enoug h businesse s tha t mee t thei r investmen t cri - teria , an d thei r abilit y to rela x thes e investmen t criteri a is limite d by thei r reluctanc e to inves t in unfamilia r industrie s an d markets ;

.

th e majorit y of th e investmen t proposal s tha t the y se e ar e of poo r quality ;

.

to a lesse r extent , the y fai l to negotiat e acceptabl e term s an d condition s with entrepreneurs.

The clea r implicatio n of thi s stud y is tha t th e eÚectivenes s of curren t governmen t

intervention s in th e informa l ventur e capita l marke t to increas e th e amoun t of equit y capita l tha t is channelle d to ne w an d growin g businesse s ± involvin g th e provisio n of

ta x incentive s an d contributin g to th e operatin g cost s of busines s ange l network s ± will

be limite d becaus e of th e existenc e of variou s barrier s tha t preven t busines s angel s fro m investin g as ofte n as the y woul d like to . Thi s evidenc e therefor e suggest s tha t th e

tim e has com e to fundamentall y redesig n th e concep t of busines s ange l networks . As originall y conceived , busines s ange l network s were base d on a diagnosi s of informatio n

ine Ý ciencie s in thi s capita l market . As a result, the y hav e bee n establishe d to provid e

a channe l of communicatio n betwee n investor s an d entrepreneur s in orde r to mini -

mize the cos t of th e entrepreneur ’ s searc h fo r capital , an d enablin g investor s to exam -

in e investmen t opportunitie s tha t mee t thei r screenin g criteria , withou t compromisin g

thei r anonymity . Busines s ange l network s hav e bee n judge d to be a success , bot h in term s of thei r direc t impact s (promotio n of investmen t opportunities , mobilizatio n of capital , investmen t activity) , induce d investmen t eÚ ect s (leverage d ban k lending) , indirec t eÚect s (advic e an d signposting , feedback ) an d cost-per-jo b (Harriso n an d Maso n 1996 , bu t se e Blat t an d Ridin g 1996 , fo r a dissentin g view). However , con- ventiona l BAN s wil l no t caus e reluctan t potentia l investor s to ente r th e market , nor will the y caus e th e owner s of ` lifestyle ’ ® rm s to attemp t to expan d thei r businesse s by usin g externa l equit y capital . Neithe r ar e the y abl e to exer t muc h qualit y contro l ove r eithe r thei r investo r or busines s clients . Furthermore , the y withdra w fro m th e proces s as soo n as th e introductio n is made , an d so pla y no rol e in th e pricin g and structurin g of an y deal , whic h ar e signi ® can t ` dea l breakers ’ (Freea r et al. 1994) . The clea r implicatio n is therefor e tha t ther e is a nee d to develo p ` secon d generation ’ BANs whose rol e is muc h wider tha n simpl y being an informatio n broker , supplyin g sum - mar y informatio n on investmen t opportunitie s to busines s angels . The focu s of suc h BANs shoul d be on educatin g th e marke t place . 12 Man y busines s angel s hav e fairl y narro w investmen t criteri a which the y will onl y relax in certai n circumstances . Thus , th e probabilit y tha t a particula r opportunit y will be of interes t to an y singl e ange l is fairl y low . This underline s th e importanc e of achievin g critical mas s in term s of investor s an d investmen t opportunities .

Accordingly , BANs mus t becom e muc h mor e proactiv e in thei r marketin g eÚorts . In addition , the y must als o see k way s in which the y can broade n th e investmen t

criteri a of investors , fo r example , by developin g educationa l activitie s 13 an d encourag e

th e formatio n of investo r syndicates . The feasibilit y of providin g independen t technol -

og y du e diligenc e service s shoul d als o be revisite d (Freea r et al. 1996 , Maso n an d

Harriso n 1998) . Mor e generally , BAN s nee d to rais e th e knowledg e an d competenc e of bot h entrepreneur s an d busines s angel s an d als o th e smal l busines s ` suppor t net - work’ ± accountants , lawyers , banks , consultant s an d advisers , etc . ± by developin g

educationa l material s an d runnin g workshop s and seminars . There ar e thre e speci ® c priorities . First , BANs mus t see k to educat e entrepreneur s on th e advantage s of equit y ® nancing , in orde r to conver t th e nee d for equit y ® nanc e int o demand . 14 Second,

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BANs nee d to ensur e businesse s ar e ` investo r ready ’ when the y ar e promote d to investor s and busines s angels . This involve s helpin g entrepreneur s to understan d th e expectation s an d requirement s of investor s an d ho w to mak e thei r busines s plan s int o attractiv e investmen t opportunitie s (Maso n an d Harriso n 2001) . Previou s studie s hav e highlighte d problem s associate d with incomplet e informatio n in busines s plan s (Maso n an d Roger s 1997) an d presentationa l de ® ciencie s (Maso n an d Harriso n 2000c) . Third , bearin g in min d tha t busines s angel s ar e a heterogeneou s populatio n with di Ú erin g level s of familiarit y with technique s of investing , rangin g fro m successfu l cashed-ou t seria l entrepreneur s on th e on e han d to inexperience d an d ` virgin ’ inves - tor s on th e other , ther e is a nee d fo r BANs to hel p th e latte r grou p to rais e thei r competenc e in al l aspect s of ` doin g th e deal ’ ± ho w to ®nd , evaluate , price , structure , monitor , ad d valu e an d exi t fro m ventur e deals. However , rede ®nin g th e rol e of BAN s in thi s wa y raise s obviou s question s of resourcing . To becom e mor e proactiv e an d to engag e in a wider rang e of investo r an d entrepreneu r educatio n will requir e substan - tia l additiona l fundin g an d it will no t be possibl e to recou p th e additiona l cost s throug h registratio n fee s an d succes s fees . The rational e fo r governmen t an d othe r sponsor s to provid e additiona l funding , as always , is tha t ` a thrivin g informa l ventur e capita l marke t is a pre-requisit e fo r a vigorou s enterpris e economy ’ (Advisor y Counci l on Scienc e an d Technonog y [ACOST] 1990 : 41) . This receive s con ® rmatio n in th e Globa l Enterpris e Monito r [GEM ] 200 1 study , which report s tha t ` th e prevalenc e of informa l investor s ha s a statisticall y signi ® can t positiv e associatio n with th e overal l leve l of entrepreneuria l activit y and a stronge r relationshi p with th e leve l of oppor - tunit y entrepreneurship ’ . In othe r words , in countrie s wher e th e populatio n is invest - in g mor e persona l funds , th e leve l of opportunity-drive n entrepreneuria l activit y is signi ® cantl y highe r (Reynold s et al. 2001: 22). In examinin g th e rol e of th e informa l ventur e capita l marke t in th e fundin g of venture s at thei r seed , start-u p an d earl y growt h stages , it is no longe r su Ý cien t to de ® ne th e proble m as a lac k of availabl e capital : busines s angel s hav e signi ® can t funds availabl e an d ar e prepare d to inves t more . No r is it a matte r of th e mobilizatio n of th e capita l tha t is available , which intermediatio n initiative s suc h as BANs address , as a signi ® can t proportio n of investor s repor t receivin g poo r qualit y (non-investable ) busi - nes s opportunitie s bein g presente d to the m fro m thi s source . Rather , th e issu e is fundamentall y on e of competence : man y investor s lac k familiarity with technique s of successfu l investing , th e opportunitie s which com e forwar d mor e ofte n tha n no t ar e no t ` investmen t ready ’ , an d th e botto m leve l servic e provider s in th e smal l busines s suppor t networ k lac k th e expertis e neede d to ad d valu e to th e process .

Notes

1. An earlie r versio n of this paper was presented at the 21s t Babson College-Kau Úma n Foundation Entrepreneurship Research Conferenc e at JoÈ nkoÈ ping Internationa l Business School, JoÈ nkoÈ ping, Sweden, June 2001 .

2. Moreover , this wa s an exceptional an d wholl y untypical year . In 1999 , venture capita l fund s mad e 26 0 early-stag e investments (23 % of the total ) an d in 199 8 mad e 24 1 suc h investments (21% ) (BVCA

2001).

3. It should be note d that ` national ’ in this context means Englan d an d Wales . LINC Scotland, whic h is no t a member of NBAN, provide s business ange l networ k services fo r Scotland.

4. One of these special associates , Equity Link, comprise s a networ k of 12 loca l BAN s in southern England .

5. Thi s study, whic h was commissioned by the National Business Ange l Network, is in this category .

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more critical need fo r networking) , smalle r amount s to inves t an d remoter locations . However , it is impossibl e to empirically test fo r the existence of an y biase s because of the diÝ culties in identifying business angel s (Wetze l 1981 , Maso n an d Harriso n 1994) . Moreover , previou s studies of angel s wh o ar e members of BANs doe s no t suppor t this stereotype (Maso n an d Harriso n 1999) .

7. It was no t possible to test for non-response bias because fo r reason s of con ® dentiality we wer e no t provide d wit h an y persona l informatio n tha t NBAN hold s on it s registere d investors .

8. In this respect, respondents diÚer fro m the recently identi® ed so-calle d ` mas s aÞ uent’ clas s in the UK ±

these ar e similar in income an d net wealt h terms, bu t this has been mostl y acquired fro m employment, notabl y in the ® nancial service s sector, an d they hav e limite d exposur e to entrepreneurial activit y of an y

sor t (als o se e Anderson 1998) .

9. Just under one-quarter (24% ) of these investments wer e identi® ed throug h informatio n provide d by NBAN.

10 . Thi s scheme provide s privat e investor s makin g investments in qualifyin g unquoted companie s wit h income ta x relie f on the amoun t invested , an y investment gain s ar e exempt from capita l gain s ta x an d an y losse s fro m th e investment can be set agains t future income tax liabilitie s an d it provide s the abilit y to roll-ove r ta x on capita l gain s arisin g fro m the disposa l of other assets (Inland Revenue 2000) .

11 . In vie w of th e geographicall y fragmente d natur e of the informa l venture capita l marke t it is quite

possibl e that there ar e regiona l variation s in the strengt h of these impediments to investing . However , it has no t been possibl e to explor e this issue wit h th e availabl e data. Thi s is a fruitfu l avenu e of enquiry fo r future research. 12. Lange et al. (2002 ) highligh t an additional pressure on BAN s tha t is prompting suc h a change in focus.

They argu e tha t th e impact of the internet is makin g it harder an d harde r for BAN s to charge fo r their basi c matchmakin g service s because it ha s become easie r fo r entrepreneurs to ® nd source s of ® nance withou t their help. Thi s is putting pressure on BANs to ad d valu e to their services. They expect tha t BANs will respon d by evolvin g from pure intermediation services to become a on e sto p resourcing service where ® nanc e is just on e piece of a very comple x packag e tha t als o includes tea m building, management recruitment, advisor y boards , directors, etc .

13 . A goo d exampl e is CONNECT, which was initiall y develope d in San Diego but has since been cloned in severa l othe r localitie s aroun d the world , including Scotlan d an d Sweden. Its objective is to suppor t the creation , development an d growt h of technology-base d enterprises. It doe s this in a variet y of ways , including a programm e of seminars, brie ® ngs , workshop s an d forum s designe d to develop the knowledge an d expertise of th e investment community, adviser s an d policy-makers . On e of th e elements in this programm e is a ` Technology brie® ng ’ .

14 . Th e extent of equity aversio n is underlined by th e followin g statistic : fou r ou t of every ® ve smal l ® rm s tha t are referre d by banks to LINC Scotlan d to rais e equity ® nanc e fro m business angel s refuse to go (Grahame , 18 Apri l 2001) .

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