Frontiers of Entrepreneurship Research, 1995

Frontiers of Entrepreneurship Research
1995 Edition


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    FRONTIERS OF ENTREPRENEURSHIP RESEARCH 1995.


    DEVELOPING THE INFORMAL VENTURE CAPITAL MARKET IN THE UK:
    IS THERE STILL A ROLE FOR PUBLIC SECTOR BUSINESS ANGEL NETWORKS?

    Colin M Mason, University of Southampton
    Richard T Harrison, University of Ulster, UK

    ABSTRACT

    Business angel networks (BANs) provide a channel of communication between private investors (business angels) and entrepreneurs seeking risk capital. Most operate locally on a not-for-profit basis with their costs underwritten by the public sector. However, the recent establishment of BANs by private sector organisations in the UK has led to a questioning of the government's continuing role in the financing of BANs. This paper demonstrates that there are significant differences between public sector, not-for-profit and private, for-profit BANs in terms of the investments that they facilitate. Private sector BANs are primarily involved with larger, later stage deals whereas investments made through public sector and other not-for-profit BANs are generally smaller, involve start-ups and other early stage businesses and are local. The emergence of private sector BANs has therefore not eliminated the need for public sector support for locally-oriented networks.

    INTRODUCTION

    There is a large measure of agreement that a lack of equity finance represents a major constraint on the formation and development of small and medium-sized enterprises (e.g. ACOST, 1990; EVCA, 1993a). The expansion of the institutional venture capital industry in many developed economies during the past 10-15 years has provided a new source of risk finance. However, its role in the entrepreneurial process has been increasingly limited by three factors (Mason and Harrison, 1995a).

    First, the amounts raised and invested by the institutional venture capital industry have fallen since the late 1980s, with implications for the anticipated levels of investment in the mid- and late-1990s (Murray, 1995), a trend reported in both the UK (Murray, 1991) and in continental Europe (EVCA, 1993b). Second, the investment focus of the venture capital industry has shifted progressively away from early stage and technology-based ventures towards later stage deals, particularly management buyouts and buyins (Murray, 1995). Increasingly, therefore, the venture capital industry is shifting from "classic" to "merchant" venture capital (Bygrave and Timmons, 1992), and is specialising in the provision of replacement equity rather than new equity to start-ups and early stage ventures (Murray, 1995; Murray and Lott, 1995). Third, there is a high degree of spatial concentration of venture capital activity, both in terms of firms and investments, in core regions at the expense of peripheral, economically lagging, regions (Martin, 1989; Mason and Harrison, 1991). The consequence is that without a well-developed regional concentration of venture capital the more disadvantaged will be the entrepreneurs in these regions in terms of access to venture finance.

    The policy response to this situation has been, in part at least, the development of various initiatives intended to close these various gaps in the supply of venture capital, at both the national and regional scales. These initiatives include tax-based schemes to stimulate private individuals to invest in unquoted companies (e.g. Harrison and Mason, 1989), the development of public sector venture capital funds, and support for the operating costs of private sector venture capital funds, particularly those targeted at early stage ventures (e.g. Murray, 1994). However, each of these initiatives is subject to the criticism of limited impact (Mason and Harrison, 1995a).

    It has been argued that informal investment - the provision of risk capital directly to new and growing businesses by private individuals (or business angels) with no prior connection with the business - represents a more appropriate source of capital for early stage ventures (Walker, 1989; Pettit and Singer, 1985). Business angels tend to make small scale investments in start-up and early stage ventures, bring a significant hands-on value added contribution to the businesses in which they invest, are geographically dispersed, and tend to invest locally (thereby recirculating wealth within communities and regions) (Mason and Harrison, 1994). Informal venture capital is now recognised as a major (if not the major) source of equity finance for the SME sector (Bannock, 1991; Harrison and Mason, 1993). However, full understanding of its significance is limited by the absence of market data which would permit estimates of scale, impact and trends over time. In particular, in the absence of market data it becomes very difficult to assess the need for, and scope of, public policy intervention in the informal venture capital market to ensure that growth-oriented SMEs have full access to the long-term development capital required to enable the realisation of their full potential.

    This reflects the fact that, unlike the institutional venture capital industry, the informal venture capital industry is a hidden or invisible market (Wetzel, 1994), lacking effective channels for business angels and entrepreneurs to make contact with one another. Informal investors comprise an unorganised, fragmented and, because of their desire for anonymity, a largely invisible market which renders them very difficult to identify by entrepreneurs seeking private sources of venture capital. At the same time, most business angels cannot find sufficient investment opportunities that meet their investment criteria. This reflects the considerable time required to search for, and appraise, investment opportunities and the fact that for most investors it is a spare-time activity. Consequently, they tend to adopt an ad hoc, unscientific and passive approach, placing considerable reliance on friends and business associates for referrals. Thus, serendipity largely determines the number and quality of investment opportunities that come to an investor's attention.

    Business angel networks (BANs) are an attempt to overcome the problems associated with the invisibility of informal investors and the high search costs for businesses seeking investors and investors seeking investment opportunities by providing a channel of communication between informal investors and entrepreneurs seeking finance. Their objective is to enable entrepreneurs to bring their investment proposals to the attention of a number of private investors simultaneously and provides investors with a convenient means of identifying and examining a range of investment proposals while retaining their anonymity until they are ready to enter into negotiations with an entrepreneur. They do not function as dealers, investment brokers or investment advisors and are not involved in any negotiations between investor and entrepreneur or in structuring the transaction.

    There are examples of BANs in the USA, Canada, UK and Scandinavia (Harrison and Mason, 1995; Mason and Harrison, 1993; 1995a). Most BANs operate on a not-for-profit basis, with some or all of the costs underwritten by state or quasi-state bodies. Indeed, experience in North America and the UK suggests that BANs cannot be operated as a profit- making activity (Mason and Harrison, 1993; 1995a). However, in the UK at least, the recent entry of private players into this market, including one of the major clearing banks (Mason and Harrison, 1995b), has led some senior government officials to float the idea that this removes the need for government involvement in the funding of BANs and that the public sector should therefore withdraw and leave the market free to develop in its own way.

    Against this background, in this paper we wish to address three specific issues in the context of the informal venture capital market in the UK. First, how has the nature of BANs changed? Second, what impact do BANs have on the flow of informal venture capital? Third, is there still a role for public policy in the support of BANs? Specifically, does the entry of private sector BAN operators remove the need for public sector services, or do they, in fact, meet the needs of only a segment of the informal venture capital market, leaving a continuing need for public sector involvement to ensure that the informal investment market functions as effectively as possible?

    BUSINESS ANGEL NETWORKS

    The growth of research interest in the role and scale of informal venture capital activity in recent years has been accompanied by a parallel expansion in the number and range of initiatives, both private and public, to service and develop the informal venture capital market. The number of BANs in the UK listed in the annual British Venture Capital Association directory has risen from 17 in 1993 to 32 in 1994 (BVCA, 1993; 1994), and additional services continue to be launched. The emergence of these 'visibleÕ sources of informal venture capital now makes it possible for the first time to collect and analyse comprehensive statistics on investment activity in one section of this market. However, it should be noted that the vast majority of informal investments are made without the involvement of such intermediary organisations and so remain invisible and hence undocumented. The investment statistics which provide the basis for this paper are the tip of the informal venture capital iceberg.

    In this section we develop a typology of BANs and use it as a framework to examine the extent to which different types of networks are associated with different types of business angel and investment deal.

    Historically, in the UK as elsewhere, BAN mechanisms which seek to 'match' or otherwise introduce entrepreneurs seeking finance with private investors looking to make investments in unquoted companies have been dominated by public sector or not-for-profit organisations with a primarily local or regional focus. However, based on the directories which we have compiled for the BVCA (1993; 1994) it is possible to identify three shifts in the nature of such networks in the UK. The basis for our analysis of these shifts in the evolution of the business angel capital market is a classification of active BANs listed in the BVCA directory (BVCA 1993; 1994), with the addition of three initiatives (NatWest Angels Service, Baronsmead Business Angels Fund, and CEX Partnership) which have launched subsequent to the compilation of the most recent BVCA Guide in December 1994 (Table 1).

    Our classification makes an important distinction between those services which operate at a local or regional scale, serving a population area typically of 1-2 million, and those which have a national operating area. As Table 1 makes clear, local/regional services still dominate (18 out of 34 BANs). However, since mid-1993 there have been 12 new initiatives launched, of which seven are at the national scale. While not yet a sufficiently strong trend on which to base definitive conclusions, this does raise the issue of the relevant operating scale for such networks, particularly in the light of a recent study which suggests that business angels do not geographically restrict their investment preferences (Stevenson and Coveney, 1994), contradicting the accumulation of research evidence from various countries that actual investments exhibit a strong degree of geographic localisation (e.g. Gaston, 1989; Harrison and Mason, 1992; Landstršm, 1993). In particular, it raises the following questions. Are the investors who register with local services different (in terms of capital available, preferred investment size, venture stage preferences, geographical orientation and sector preferences) from those registering with national services? And are the investment deals facilitated by local or regional BANs different from those facilitated through national networks?

    A second distinction in the classification is between those services which have been set up by or are run by and receive their financial support from public sector agencies (although it is normal for such networks to achieve partial cost recovery through charging registration fees) and those which are operated by the private sector, normally on a for-profit or loss-leading basis. Public sector/not-for-profit BANs, of the kind reviewed and discussed elsewhere (e.g. in Harrison and Mason 1995), offer only an introduction or matchmaking service, normally in the form of an investment opportunity publication of some kind and, in some cases, investment clubs. They are prevented by securities legislation from having an involvement in the post-introduction deal-making process. Only LINC amongst the not-for-profit networks operates on a national scale, although as it actually delivers its services through various local enterprise agencies it could equally be classified as a local/regional service. Increasingly, however, these public sector/not-for-profit services have been joined by a range of private sector, for-profit networks: eight of the 12 new networks started since mid-1993 have been established by the private sector as commercially-oriented services.

    There are two types of private for-profit BANs. The first category operate as 'conventional' introduction services: these can be further subdivided into those which produce and circulate investment opportunity bulletins (e.g. Venture Capital Report, The Capital Exchange), and those which have created computer databases of investment opportunities (e.g. Venture Net) and business angels (e.g. NatWest Angels Service). The second category are offshoots of the corporate finance activities of financial service companies which view the venture rather than the investor as their client and, in part because of the economics of deal appraisal and monitoring costs, have rather higher minimum investment thresholds than public sector/not-for-profit services. They are also more likely to make a charge in the form of a success fee levied on those businesses that are successful in raising finance. The implication of the shift towards private sector networks is that it will be reflected in the nature and cost of the service offered and in the type of investment facilitated.

    A third, and emerging, distinction that can be made between BANs is in terms of the types of mechanisms which are used to match investors and businesses. The conventional or 'classic' approach discussed above still dominates: all of the public sector/not-for-profit networks and 14 of the 20 private sector networks use conventional matching techniques. However, within the private sector there have been two recent developments which significantly change the nature of the informal investment capital market. First, a number of organisations (referred to in Table 1 under the heading 'ancillary service') which specialise in matching people - for example, experienced executive and non-executive directors - to companies which have strategic gaps in their management teams have entered the informal venture capital market. This arises from the fact that such executives frequently wish to invest in the company in which they are placed. Second, a new development in the UK is the emergence of what may be described as 'institutional archangels' - organisations which identify, screen and structure investment prospects which are syndicated among their network of business angels. These networks may, in turn, have a fixed or floating membership. Normally the institutional archangel receives a fee from the investee company for putting a deal together. Within this category, the entry of some venture capital companies in seeking to create networks of business angels is an interesting development. Some of these venture capital companies are creating funds into which business angels will invest, with the angel expected to play a passive role in the investment; in other cases, the venture capital firm will match the business angel to businesses in its deal flow, taking account of the angel's investment criteria and experience.

    The combined effect of these shifts in the nature and characteristics of BANs in the UK is reflected in a shift downwards and to the right in Table 1. Our contention in this paper is that investments made through these private sector and new institutional forms of angel network are likely to be larger than typical business angel investments and more likely to involve later stage deals and the provision of development finance. Business angel investors are also less likely to be involved in a hands-on basis in the investee businesses. As such, they may be thought of as representing the development in the business angel market of a 'merchant capital' orientation, similar to that which has occurred in the formal venture capital industry (Bygrave and Timmons, 1992). The implication is that if public sector support is withdrawn from local, not-for-profit BANs this will result in a decline in those informal investments which involve smaller deal sizes, are oriented towards start-up and early stage investments and have a high value-added element arising from the hands-on involvement of the investors.

    In the following section we begin to examine the impact of these BANs on the flow of capital into the SME sector as a prelude to the subsequent section which provides the first systematic analysis of the deal characteristics of different types of BANs in the UK.

    DATA SOURCES

    Comprehensive statistics on the investment activity of venture capital firms in the UK are collected and published annually by the BVCA. However, because of the invisibility of business angels (they are not listed in any directories and have a strong preference for anonymity) it has not been possible to collect equivalent information on the informal venture capital market. Thus, informal venture capital investment activity is largely unknown and undocumented except on an ad hoc basis.

    However, the recent increase in the number of BANs (listed in the BVCA's Guide to Sources of Business Angel Capital: BVCA, 1994) means that there is now a small - but significant - part of the informal venture capital market which is visible and for which it is possible to collect comprehensive statistics on investment activity.

    Seventeen of the 32 business angel networks (BANs) listed in the latest BVCA Guide (BVCA, 1994) provided information on the investments that they had facilitated in the period July 1993 to June 1994. Non-responses are due to two factors: (i) the method of operation of some organisations prevents them from being able to track the outcome of the introductions that they provided; (ii) some have been launched too recently to have been involved in any investments.

    It is important to bear in mind when interpreting the data that we have been dependent on the BAN managers for the accuracy and comprehensiveness of the data supplied. It has not been possible to date to triangulate this data, for example, by making direct contact with the businesses receiving finance, although future research on this data source could include such an approach (but this is not possible in a significant number of cases as some BANs did not supply company names in order to preserve client confidentiality). It should also be noted that although we have specifically collected the investment data reported on in this paper as a special exercise in conjunction with the BVCA, many of the data are listed in the VCR Guide to Venture Capital in the UK and Europe (Cary, 1995) and so are in the public domain.

    INFORMAL VENTURE CAPITAL INVESTMENT ACTIVITY 1993/94

    Business angels registered with the networks that responded to the survey made a total of 100 investments in businesses that were also registered with these services. Seventy-eight of these investments only involved business angels registered with the BANs; they invested a total of £5.1m. The remaining 22 investments involved additional co-investors not registered with the BANs, some of which were financial institutions; these investments totalled £9.2m, £2.2m of which was invested by business angels registered with the BANs and £7.1m invested by the co-investors. Thus, in total business angels registered with the BANs invested £7.3 million in these 100 businesses. However, the total investment, including co-investors, is £14.4m. Although this is equivalent to only 1% of the amount invested by venture capital firms in 1993 it must be remembered that these statistics cover only a small fraction of informal venture capital activity.

    A total of 257 business angels registered with the BANs invested in the 100 businesses. However, this figure is dramatically skewed by a single investment involving 103 investors; excluding this, 154 business angels invested in 99 deals, an average of 1.6 angels per deal. In fact, the vast majority of deals involved a single investor: 80 business angels invested without another BAN registered investor; of these, however, 11 invested with a co-investor not registered with the BAN and 69 invested entirely on their own.

    On the demand side, the overall size of investment deal ranged from under £10,000 to over £3m. More than half (54%) involved investments of under £50,000 and nearly three-quarters of investments involved a total commitment of under £100,000 (Table 2). Although there were only a small number of larger deals, these account for a significant proportion of the total amount invested: just seven deals of over £250,000 accounted for 57% of the total amount invested. These figures confirm that most deals involving business angels are for amounts well below the threshold typically considered by venture capital funds. However, some business angels participate in much larger deals, either on their own, as part of business angel syndicates or co-investing with financial institutions, including venture capital funds (such as 3i: see 3i plc, 1994).

    On the supply side, most business angels commit up to £50,000 to a single investment; indeed, the median size of investment per investor per deal is £30,000 (see Table 3). Nevertheless, there is a small but significant group of business angels who will commit up to £250,000 in a single investment. Indeed, two main types of business angels can be identified on the basis of their size of investment - the larger group has a typical investment of about £20,000 and the other, smaller, group has a typical investment size of about £100,000: this confirms the findings of other recent research in the UK (3i plc, 1994).

    Based on the data on these 100 investments, business angels are involved in all financing stages from seed capital through to rescues and management buyouts/buyins (see Table 4), although they are predominantly providing start-up (32%) and early stage financing (21%), with a significant minority also involved in providing expansion finance (32%). However, when the funds committed by non-BAN co-investors are included, MBOs/MBIs have attracted a disproportionate share of the total amount invested (40%), and include three of the seven largest investments (each involving a total investment of over £250,000).

    Investments by business angels are also characterised by a wide diversity of industrial sectors but with a distinct orientation to manufacturing, and in particular technology-based sectors. In terms of number of investments, consumer-related businesses were the most popular (22%), followed by industrial products and services (13%) and other manufacturing (13%). However, just three sectors accounted for more than half of the total amount invested: industrial products (32%), electronics-related (15%) and financial services (10%). Technology-based businesses accounted for almost one-quarter of investments by number and by value (and nearly one-third of the amount invested by BAN investors) (Table 5).

    The regional distribution of investments is, of course, influenced by the location of local business angel networks, although national business introduction services are responsible for more than half of the investments in this analysis. With this caveat, it is clear that investments by business angels are widely distributed throughout the UK (Table 6), but with significant concentrations in the South West (23%), Greater London and the South East (30%), the North West (12%) and Scotland (10%). Yorkshire-Humberside has attracted a disproportionate amount of the finance invested (23%), on account of one very large investment where most of the finance was contributed by a non-BAN co-investor. The one overseas investment has also accounted for a significant share of the total amount invested. Overall, the South East/East Anglia has received a disproportionately large share of the amount invested by BAN investors (51%).

    In summary, this first analysis of informal investments facilitated through business angel networks suggests that such networks can be effective in addressing the venture capital equity gap discussed in the introduction - identified in terms of the pool of capital available, the investment focus of venture capital funds (avoiding small deals, start-ups and early stage deals, and technology-based firms) and the regional concentration of the industry. Over half of the deals involved investments of under £50,000; over half provided start-up and early stage financing; although still regionally concentrated, almost half of the deals were outside the South East/East Anglia core region; and almost one-third of BAN investor investment was committed to technology-based ventures.

    However, these aggregate data, while supporting the argument that BANs can be effective in closing the bottom-end equity gap, do not in themselves address the issue of whether there is still a role for the public sector provision of such networks. Accordingly, in the following section we provide some disaggregated statistics, using the classification of BANs developed above (Table 1), to address the question: do public sector not-for-profit BANs facilitate different types of informal investment deal (in terms of size, sector, stage and location) than do private sector networks?

    INFORMAL INVESTMENT ACTIVITY: A DISAGGREGATION BY TYPE OF BAN

    In this section we use this dataset to examine the types of investments made by the various types of BANs. This provides the basis for assessing the extent to which each of the three shifts in the composition of BANs discussed above is reflected in differences in the nature and characteristics of the investments which they facilitate. The key differences are summarised in Table 7: no tabulations have been included for the institutional archangels or ancillary services itemised in Table 1 above because of the very low numbers involved (six deals in total) .

    Local/regional public sector/not-for-profit services

    Locally-based business introduction services, which are primarily operated by Training and Enterprise Councils (TECs) and Business Links (public-private business support organisations), account for 38 of the 100 investments covered in this survey. Total investment by registered investors is £2.55 million, with other investors contributing a further £1.28 million, giving an aggregate investment of £3.8 million. Investments are typically small and a majority (24, or 63%) involve a single investor. Just 32% involve non-registered investors, and a majority of these deals are also characterised by investment from more than one business angel. Median deal size (i.e. including any co-investors) is just £50,000; the median investment by business angels per deal is £30,000.

    Investments cover a wide variety of industries, with no category accounting for more than 16% of the total: the largest categories are other manufacturing (6 deals), consumer-related manufacturing (5), industrial products and services, communications and computer-related (all 4). In terms of stage of investment, the largest single category is expansion finance (13 deals, or 34%). However, together start-up and other early stage investments account for 47% of the total. Businesses are typically very small: 71% had only one employee and a further 18% had just two employees.

    These deals exhibited a high level of geographic localisation: 37 of the 38 investments were in the local areas serviced by these networks. Thus, the geographical distribution of these investments, with seventeen (45%) in the South West, a further eight (21%) in the South East and seven (19%) in the North West, reflects the locations of these networks. We also know from other research that most of the investors were also locally-based (Mason and Harrison, 1995c).

    National-scale public/not-for-profit services

    LINC, which is the only business introduction service in this category, accounts for 19 of the investments in the survey, involving a total investment of just over £750,000. The information supplied by LINC is, however, incomplete as it indicates that all investments have been made by a single investor and that no co-investors have been involved, which is contrary to evidence from a survey of LINC investments which included some made in the study period (Mason and Harrison , 1996).

    As noted earlier, LINC is actually a federation of 12 local business introduction services. It might therefore be expected that the profile of LINC investments will be very similar to those made through local public sector/not-for- profit services. However, there are some important differences.

    First, LINC investments are smaller, with a median investment per registered business angel of just £20,000 compared with a median investment size of £30,000 for investments made through local not-for-profit services (LINC's lower quartile is also smaller: £12,500 cf £20,000). Second, LINC's investments are predominantly amongst start-ups (8 deals) and other early stage (6) which comprise 74% of the total. Third, 18 of the 19 investments were in one-person businesses. Fourth, the sectoral composition of businesses is less diverse. However, the proportion of manufacturing businesses (53%) is similar to that of local/regional public sector/not-for-profit services.

    These differences seem likely to be attributable to the contrasting organisational locations of LINC agencies and locally-based public sector/not-for-profit business introduction services, the effect of which is to influence the nature of promotional networks and, in turn, deal flow. Most LINC agencies are operated by local enterprise agencies. These organisations primarily provide start-up business counselling. In contrast, as noted earlier, most local public sector/not-for-profit services are based in TECs or Business Links which provide a much broader range of services for SMEs, including services targeted at growth-oriented businesses, with implications for their profile and networks.

    Scotland accounts for six of the investments made through LINC, with the South East accounting for a further five, and the West Midlands with three. A small number of LINC member agencies have traditionally been responsible for recruiting a disproportionate share of investors and investment opportunities, and in achieving investments (Mason and Harrison, 1995d). The geographical distribution of LINC investments is therefore more a reflection of these more active agencies rather than the configuration of its overall network. Here again, we know from a previous study that the majority of LINC investors have invested in businesses located within 50-100 miles of their home/work (Mason and Harrison, 1995d). We also know from other research that LINC investors typically play an active hands-on role in the businesses in which they invest (Mason and Harrison, 1996).

    Private, for-profit services

    Despite the large number of networks in this category we only have information from five organisations. This is partly a reflection of the newness of many of these networks but it also arises from the unwillingness, for time, logistical or confidentiality reasons, of many of these organisations to provide investment data.

    As might be anticipated, investments made through private for-profit services are larger than those made through public sector/not-for-profit services, with a median investment size of £125,000 and a median investment per registered investor of £75,000 per deal. Further confirmation of the much larger deal size of investments made through private for-profit BANs is provided by their investment opportunity circulars. In the case of Blackstone Franks, 83% of their investment opportunities in 1994 were seeking amounts in excess of £100,000, while the equivalent proportion in the case of WINSEC was 50%.

    In most other respects, there are relatively few contrasts between private, for-profit and public/not-for-profit services. Just over 60% of investments involved a single investor. In terms of stage of investment, more than one-third are expansion financing compared with one-quarter that are start-ups and a further one-quarter that are other early stage. The industrial distribution of investments exhibits a bias towards manufacturing, with the largest categories being consumer-related manufacturing (8 deals), other manufacturing (6) and industrial products and services (4). However, the proportion of investments in technology-based industries was lower, at just 14%. Finally, the geographical location of investments exhibits a marked bias towards South East England/East Anglia, which accounts for 46% of the total.

    However, it is important to note that private sector, for-profit BANs is the least homogeneous category, comprising a variety of different organisations, matching approaches and motivations. Moreover, the investment information is heavily weighted by Venture Capital Report (VCR) which accounts for over half of the investments in this category for which we have information. VCR investments are quite distinctive from those of the other private sector BANs for which we have information (see Table 7, final two columns): in particular, VCR's investment size is smaller, with a median investment size of £68,000 compared with £135,000 for other private sector BANs and a median investment per registered investor of £68,000 compared with £106,500; its investments are oriented towards smaller businesses (95% with a single employee cf 56%); its investments are also weighted towards start-ups and other early stage (67% cf 31%); and its investments are more likely to involve a single investor (81% cf 44%)

    Institutional archangels

    As noted earlier, institutional archangels are a new phenomenon on the UK informal venture capital scene. At the time of the survey none of the institutional archangels in the BVCA guide had made any investments. However, the intention of these various institutional archangels is to syndicate investments between several private investors, each of whom will commit upwards of £25,000 per deal, with total deal sizes likely to be in the range £250,000 to £1 million and above. The one investment for which information is available was for £2 million in a management buyout, involving 20 investors who each invested £100,000, which was put together by MM&K's CEX (Chief Executive) Partnership.

    Private, for-profit ancillary services

    The small number of organisations in this category makes it is difficult to generalise. We have responses from both organisations which were each involved in three investments over the review period. Investments ranged from £5,000 to £150,000 and typically (4 out of 6) involved co-investors. Median investment size per business angel was £27,500. All of Interim Management's investments were management buyouts whereas all of the investments made through Solutions for Scotland were in start-ups.

    CONCLUSIONS

    The evidence presented here indicates that BANs are having a significant impact in mobilising and channelling informal venture capital to entrepreneurial businesses. Moreover, these investments by business angels have a significant leverage effect in aggregate, with £1 of additional funding being raised from co-investors for every £1 invested by businesses angels registered with the networks. We know from other research (e.g. Mason and Harrison, 1995c) that the business angel investor is often the catalyst in enabling the deal to fall into place .

    The majority of the investments that have been facilitated by BANs are relatively small and fall within the 'equity gap', although a small minority of larger investments have also occurred. Businesses which raise finance through BANs are at all stages of development, but are weighted towards start-ups and early stage, and include a wide variety of industries but with a significant bias towards manufacturing, with electronics and other technology-based sectors well represented.

    Despite the emergence of new private sector, nationally focused BANs, the majority of deals in 1993-94 were made through local, not-for-profit networks, whose numbers have also increased, plus LINC and VCR, both long established national networks. However, it is clear that these new BANs are involved in different kinds of deals from those of the local, not-for-profit services and LINC and, to a lesser extent, VCR which occupies an anomalous position as a private sector for-profit network but whose deal characteristics in a number of respects are closer to those of local, public sector/not-for-profit networks. These private sector for-profit networks are involved with larger deals (which are also more likely to be syndicated between a number of business angels or involve co-investors), later stage deals, including MBOs/MBIs, and 'low tech' manufacturing. In addition, a higher proportion of their deals are in South East England/East Anglia. Based on their stated modus operandi we suspect, although do not yet have any supporting evidence, that such investments are less likely to have a significant 'value added' element. As suggested in the introduction, this could be regarded as the informal venture capital equivalent of 'merchant capital' venture capital (Bygrave and Timmons, 1992).

    It is therefore clear that local, public sector/not-for-profit BANs, along with LINC, are filling a different market niche to that of private, for-profit BANs. The latter are helping to fill a secondary equity gap from between c.£100,000, which is the maximum that most business angels wish to commit to a single investment, and £500,000, which is the minimum investment considered by most institutional venture capital firms, and which arises, in part, from the low levels of syndication between business angels in the UK (Harrison and Mason, 1992). Hence, their emergence does not eliminate the role of local/regional TEC and Business Link based BANs: these BANs facilitate businesses, particularly start-ups and early stage businesses, seeking smaller amounts of finance, to raise equity capital from business angels who typically wish to play an hands on role. Should the funding to enable TECs and Business Links to operate local/regionally focused BANs be withdrawn it is unlikely that these types of businesses will be able to turn to private sector, for-profit BANs to raise finance: they are less likely to meet the investment criteria of private sector BAN investors and, indeed, will in many cases fail to meet the acceptance criteria of these networks or afford their fees. Continued public sector support for TEC- and Business Link-based BANs is therefore essential to ensure that the informal venture capital market in the UK continues to thrive and the associated economic benefits continue to accrue.

    Acknowledgement.
    We are grateful to the British Venture Capital Association for inviting us to compile the directories and undertake the statistical review. Particular thanks go to Vicky Mudford of the BVCA for her valuable assistance in the organisation of the survey. However, the authors remain solely responsible for the analysis and interpretation of the data presented here.

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