The findings of this study represent, to the best of our knowledge, the first attempt to: i) examine in some detail a specific sub-segment of the population of informal investors in the UK, namely investors who have made numerous private investments; and ii) explore the linkage between individual investor characteristics, investment activity and performance. In view of the small sample size and the inherent and ever present problem of sampling bias, we are reluctant to draw firm conclusions, however, a number of patterns appeared based on our analysis of actual investment behaviour as follows:
serial investors in the UK co-invest to a much greater degree than previously thought;
investments are made in a variety of industry sectors and in a majority of instances in industries where the investor and/or syndicate partner has limited direct previous experience;
familiarity with the concept appears to be a necessary, but insufficient prerequisite to the decision to invest;
agency risk is managed, to some extent, by backing entrepreneurs which are either known personally to the investor, another syndicate member, and/or to the referrer of the deal;
when a serial investor chooses to invest with others, they display a greater propensity to back unknown entrepreneurs, however, when the performance linkage is made, prior knowledge of the entrepreneur emerges as a discriminating factor - for all but one of the investments where a loss was realised or performance had fallen short of expectations, investors or syndicate partners did not have prior personal knowledge of the entrepreneur;
in view of the time required to undertake various post-investment activities including monitoring, there appears to be limits to portfolio size of no more than four or five investments at any one time.
For investors, it would appear that some measure of diversification by industry can be achieved by participating in investment syndicates. A number of investors explicitly mentioned the importance of group composition both in terms of the blend of skills and experience each member brings to the group and likeminded expectations, particularly with respect to the timing and manner of exit. In building their portfolio, private investors need to be concerned not only with the actual number of investments made but with the pace at which investments are added to the portfolio. Respondents uniformly reported spending more time with the venture, the shorter the period of the time the investment was in their portfolio; a seemingly reasonable response to inherently high levels of agency risk in the period leading up to and immediately following the consummation of a deal.
For entrepreneurs seeking informal venture capital, our study reinforces the importance of being able to communicate in clear and unambiguous terms the nature of the investment opportunity to potential investors. Moreover, it is important for the entrepreneur to approach the right investor, preferably someone they know personally or indirectly by seeking a referral to a potential investor by someone they know. Solo and syndicate investors have invested in a variety of industries, however, if an entrepreneur chooses to approach a solo investor, they are well advised to approach one that has relevant prior industry experience. Investors do seem to face constraints on portfolio size, it goes without saying that entrepreneurs should seek funds from investors with the financial capacity and the ability to contribute time to the ongoing development of the venture.
For policy makers, particularly in the UK, which have largely concentrated their efforts on supporting means for bringing investors and entrepreneurs together in a timely and efficient manner, some thought should be given to exploring means of facilitating the formation of syndicates. Investing as part of a syndicate seems to be a much more widespread phenomenon in the UK than previously thought. Anecdotal evidence from our interviews confirmed the difficulties investors face in not only trying to unearth promising investment opportunities but in identifying suitable partners with whom to share the risk of investing in private, unquoted companies.
In a very real sense, our research has looked at investment activity from a "macro" perspective. There are a number of interesting "micro" issues which can be explored when detailed and complete private investment chronologies are provided by investors. How does the pattern of investment activity change when an investor realises a loss on an investment? A number of investors commented that they became somewhat more selective in the subsequent investments they made after a negative event by investing in industrial sectors in which they had direct experience and, more importantly, by backing people known to them personally or to their syndicate partners. Similarly, does the pattern of investment activity change when an investor realises a substantial gain on an investment? To what extent does a "play money" mentality set in whereby investors are prepared to back ventures competing in an unfamiliar industry lead by an entrepreneur unknown to them or to other investors in the deal? Over time, does an investor enhance his ability to identify "winners"?
A clear need also exists to examine issues related to investment syndication and co-investment activity. If the most active segment of the population disproportionately invests as a part of a group, it is imperative to understand the dynamics of syndication. How do syndicates form in the first place? Do groups of investors collectively make better decisions than an individual investor can make on their own? Previous research has highlighted the importance of having a balanced management team in place - does the same hold true for an investment syndicate? Does a diversity of perspectives among the investor group lead to a performance advantage? How is the relationship between an investor group and the entrepreneur managed? As with any emerging field of study, much work needs to be done and many issues remain largely unresolved.
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