Close-ups from afar: the nature of the informal venture capital market in a spatial context

The availability of external equity finance is one of the vital conditions for emergence and growth of young entrepreneurial firms. Yet, the access to finance is both limited and unevenly distributed in geographical space. At the same time, there is anecdotal evidence that the informal venture capital market plays a significant role in providing small-scale geographically dispersed finance to entrepreneurial ventures in early development stages. However, our knowledge about the nature and geographical characteristics of informal venture capital market is very limited. The overall purpose of this dissertation is to develop knowledge of the nature of the informal venture capital market in a spatial context. First, the dissertation aims to contribute to our knowledge of the informal venture capital phenomenon, by developing the understanding of different cohorts of informal venture capital investors. Second, it aims to explore the characteristics and the scope of the informal venture capital market in relation to its potential to bridge the financing gap, and particularly the regional equity gap, for young entrepreneurial firms. Third, it seeks to provide theoretical explanations for why informal venture capital exhibits certain locational patterns, and the role geography plays in informal venture capital investing. The analysis presented is based on a large quantitative material of 278 informal venture capital investors in Sweden, complemented by four case studies. This dissertation presents an inquiry into the field of informal venture capital and develops the literature by: (i) broadening the scope of the informal venture capital concept and contributing to definitional clarity, (ii) exploring the magnitude and the geographical characteristics of the informal venture capital market in Sweden, and (iii) developing our understanding of the role of proximity in informal venture capital investing

Emerging trends in government venture capital policies in smaller peripheral economies: lessons from Finland, New Zealand, and Estonia

Emerging trends from the developing venture capital industries of three smaller peripheral economies (Finland, New Zealand, and Estonia), demonstrate that government policy can overcome scale and distance barriers to assist in establishing venture capital to support innovative potential high growth ventures. Eight common policy themes for successful venture capital development are: new venture stimulation; dedicated finance policy institutions; stable, internationally harmonized tax and regulations; business angel development; inward investment; international venture capital fund development; smooth pipeline of investment; effective investment exit market. Venture capital policy development themes are interconnected, requiring a holistic ecosystem approach. A blueprint for successful small peripheral economy venture capital development requires an initial phase of new venture demand stimulation and ensuing simultaneity of policies to engineer venture capital development

False expectations: reconsidering the role of informal venture capital in closing the regional equity gap

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

The economic significance of business angels – towards comparable indicators

In the chapter the authors revisit one of the original topics in business angel research: to measure the scope of the business angel market and evaluate its impact on the economy, especially the financial contributions of business angels at the macro (market) level. This is an issue that has considerable policy relevance. Most policy initiatives to support business angel activities have been introduced without any strong empirical justification nor evidence to inform on the appropriateness of different types of policy measures. In this chapter, the authors summarize our knowledge about the size of the business angel market in different countries. The authors then turn their attention from the size of the market to its ‘significance’; in other words, shifting from a concern with measuring the size of the market to a concern with the relative importance of business angels for funding new and growing ventures in the economy. The authors propose two sets of indicators to evaluate the significance of the business angel market – one that focuses on the supply perspective, that is, the relative importance of business angel finance compared to other sources, and the other that focuses on the demand perspective, that is, the extent to which business angel finance is available in relation to the demand for capital in the small and medium-sized entrepreneur sector

What do we mean when we talk about business angels? Some reflections on definitions and sampling

Early research on business angels recognized a couple of methodological obstacles that significantly have hindered knowledge accumulation about the phenomenon. In this article we will reflect upon these methodological obstacles with focus on definitional issues and sampling techniques. The purpose is to provide a framework that systemizes and inter-relates the variety of definitions within the field as well as to critically review the sampling techniques currently applied in the research field. We maintain that researchers need to make conscious definitional choices when conducting studies of informal investors and business angels, and argue that changing the unit of analysis from investor level to deal level can help to avoid definitional inconsistencies. Further, we suggest two alternative ways of creating high quality samples of business angels and informal investors – the random sample approach and the multi-sample approach. Both procedures reduce the sample bias and allow for longitudinal analysis which is argued to be essential in future research