9 May 2011

Business Angels: Fostering Entrepreneurship, Innovation and Networks

Tomorrow starts the Annual European Business Angel Network (EBAN CONGRESS) in Warsaw. So, I have a good excuse to write down some reflections about those unknown agents for most of the population.

Business Angel is a term difficult to define (see this link for more information). Originally the term was coined to reflect those investors willing to risk their capital with close entrepreneurs. In the view of the entrepreneur they normally referred to Business Angles as the 3 F’s (Family, Friends and Fools). Recent definitions find a more professionalized view of the Business Angel. For instance, Politis (2008) define Business Angles as “individuals who offer risk capital to unlisted firms in which they have no family-related connections”. This definition is related to the fact that professional investors tend to outperform amateurs investors (Riding 2008).In my view, this more professionalized role of the Business Angel can be still compatible with the family status; however, I think it is necessary the formal contracting in any case. Another issue focuses on the wealth of the Business Angel. Although they have an important heterogeneity most of the Business Angels should make investments between 5 and 6 digits. It is worth noticing that firms-entrepreneurs that receive those funds normally have a financial constraint and a clear potential to generate growth and profits from their (new) ideas-activities or innovations.

Inexperienced Business Angels and even Serial Business Angels can suffer for identifying adequate projects for their requirements (i.e. level of investment, risk, sector, internationalization…). One solution for matching entrepreneurs and investors is the creation of Business Angel Associations. Apart from this advantage, networks also offer the possibility for investors to diversify and observe international projects (Harrison, Mason et al. 2010). In my view another advantage is that in certain conditions investors also have some possibility to transform equity in liquidity thanks to their associates. But networks appear to have some limitations, for instance the way they should be financed (Knyphausen-Aufseß and Westphal 2008).

The research on Business Angels is scarce, especially in Europe. Currently some important projects like
VICO project are focusing on the role of major private equity (Venture Capital) but the role of smaller investors (Business Angels) is disregarded.

It is especially instructive the evaluation of Business Angels Associations as long as they can suffer from financial constraint. If we want Business Angel Networks to receive more public subventions, or simply larger fees from their associates, we should be able to justify that (1) Entrepreneurship is one of the engines of the economy (Audretsch 2009), (2) Business Angel Association invest in more and better projects than independent Business Angels and (3) that firms that receive equity funds from Business Angel Associations have larger productivity growth than independent Business Angels (similar methodology to the recent working paper from
Annalisa Croce, Jose Martí-Pellón and Samuele Murtinu using European Venture Capital Data). Although the limitations of data this could be possible keeping some historical track of the investments.

But, further empirical research on Business Angels should not focus exclusively in the justification on their existence. Some research must be developed on the optimization of resources. For this line of research it would be necessary to construct empirical designs at three levels: Firm or entrepreneur, Business Angel (Investor) and Business Angel Network.

Audretsch, D. B. (2009). "The entrepreneurial society." The Journal of Technology Transfer 34(3): 245-254.
Harrison, R., C. Mason, et al. (2010). "Determinants of long-distance investing by business angels in the UK." Entrepreneurship & Regional Development: An International Journal 22(2): 113 - 137.
Knyphausen-Aufseß, D. Z. and R. Westphal (2008). "Do business angel networks deliver value to business angels?" Venture Capital: An International Journal of Entrepreneurial Finance 10(2): 149 - 169.
Politis, D. (2008). "Business angels and value added: what do we know and where do we go?" Venture Capital: An International Journal of Entrepreneurial Finance 10(2): 127 - 147.
Riding, A. L. (2008). "Business angels and love money investors: segments of the informal market for risk capital." Venture Capital: An International Journal of Entrepreneurial Finance 10(4): 355 - 369.


Miguel Ángel López Trujillo said...

Great Ferran. Not only a good overlook of the business angel arena but also good suggestion of research lines not only useful for academics but also to increase the recognition and performance of the early stage market.

Miguel Trujillo

Luis said...

Dear Ferran,
Miguel just shared your article with me. It would be interesting to see more and more researchers digging in this subject such as you are.
Let me share only one remark: when you refer to Business Angels Association investing, you probably mean Business Angels investing in the context of Business Angel Associations (Networks would be more precise) as networks only in few cases are structured in a way that they can invest directly.
Feel free to contribute to EBAN's LinkedIn group: http://www.linkedin.com/groups?gid=1504347&mostPopular=&trk=tyah

Lecturer said...

Your appreciation is right.