What determines the volume of informal venture finance investment and does it vary by gender?

Abstract

We estimate a two-equation model to jointly determine the number of informal investors and the amount of money that they invest over the last 3 years. Our model uses data on 126,189 individuals in 21 highly developed countries in the period 2002-2006. We delve deeper into the hypothesis of Burke et al (2010) that ‘the demand for informal venture finance tends to generate its own supply’. To our knowledge, we undertake the first research to move analysis of the supply of informal venture finance investment beyond estimating the propensity for a person to become an informal investor and onto the core concern which is the total volume of venture finance. We find that a one per cent increase in entrepreneurial activity increases the number of informal investors by 1.702 per cent. However, the average invested amount declines by 0.827 per cent leading to a net positive total increase by 0.861 per cent. This result indicates that, to a considerable extent, demand for informal investment creates its own supply. This effect is stronger for males than females. We also find that the level of venture capital investment has a net positive effect on the level of informal investment and that this effect is stronger for females than males.