There is little dispute that the informal venture capital market represents the largest source of external equity finance available for small and medium-sized enterprises (SMEs) and is significantly larger than the professional venture capital market. For example, Gaston (1989) suggests that in the USA professional venture capital funds make forty times fewer investments in SMEs than informal investors - or business angels as they are better known - and invest less than one-tenth of the amount invested by business angels. Estimates for the UK and Finland both suggest that the informal venture capital market is at least twice as large as the institutional venture capital market in terms of the amount invested (Harrison and Mason, 1993; Suomi and Lumme, 1994). Yet despite its importance, the amount of research that has examined the characteristics and operation of the informal venture capital market remains remarkably limited.
The initial objective of the pioneering studies of the informal venture capital market in the early and mid 1980s that were undertaken in the USA with funding from the US Small Business Administration (e.g. Wetzel, 1981; Wetzel and Seymour, 1981; Arum Associates, 1987, Gaston and Bell, 1986; 1988; Gaston, 1989) was to "put boundaries on our ignorance" (Wetzel, 1986, p 131). International interest in the topic led to studies in Canada (e.g. Short and Riding, 1989; Riding et al, 1993), the UK (Mason and Harrison, 1994), and the Nordic countries (Landström, 1993; Lumme and Suomi, 1994). As a result, there is now a fairly good understanding of what might be called the "ABC of business angels" - their investment activity, behaviour and characteristics. In addition, there have also been a number of policy-related studies which have been concerned primarily with initiatives to stimulate informal venture capital activity through the introduction of business angel networks (e.g. Mason and Harrison, 1995a; Harrison and Mason, 1996).
Thus, progress in informal venture capital research has primarily involved a "widening" of our understanding by addressing ABC-type issues in a variety of geographical contexts. This restricted focus has led to a call for a "deepening" of research, involving the opening up new research issues, such as the demand-side (e.g. Freear and Wetzel, 1990; Freear, Wetzel and Sohl, 1995), and process-based studies (e.g. Mason and Harrison, 1996; Mason and Rodgers, 1996) and more theoretically-informed studies. In their research agenda towards the year 2000, Freear and Wetzel (1992, p. 483) proposed that more attention should be given "to the need to develop explanatory and predictive theories for empirical testing". Some progress has been made in this direction, for example, by Landström (1992) who has examined the business angel-entrepreneur relationship in an agency theory context and by Fiet (1995) who has examined risk avoidance strategies of business angels and venture capitalists and how this relates to their use of networks of informants.
Nevertheless, there remain many aspects of the informal venture capital market for which no information exists and where Wetzel's call for research which puts boundaries on our ignorance remains valid and appropriate. One such issue concerns the performance of informal venture capital investments and the harvesting of such investments. Although there are some studies which have identified the expectations of business angels, in terms of their exit horizon, method of exit, the rate of return and proportion of "winners" and "losers" (Wetzel, 1981; Tymes and Krasner, 1983; Mason and Harrison, 1994) it is remarkable to note there have been no studies of the actual returns achieved by business angels nor their actual timing and method of exit.
The purpose of this paper is to fill this significant void in our knowledge of the informal venture capital market by examining the exits made by of Finnish business angels. The paper first looks at the aggregate pattern of exits and then explores differences between successful and unsuccessful investors.
Business angels are extremely difficult to identify. They have a preference for anonymity, there are no directories of individual investors and no public records of their investment transactions (Wetzel, 1981; 1987). They may also be reluctant to respond to research surveys because of the private and personal nature of the subject matter and the fear of being identified and then deluged with investment proposals (Haar et al, 1988). The size and characteristics of the population of informal investors is therefore unknown, and probably unknowable (Wetzel, 1981). Because the population is not known, this means that it is not possible to test any sample of business angels for its representativeness.
The approach that was used in this study was based on evidence from a review of previous studies that the most effective method of both identifying business angels and obtaining a high response rate is by personal contact through 'networking' (Mason and Harrison, 1994). Moreover, as investors tend to be linked by friendship and business networks, identification of an initial group of informal investor typically leads to an introduction to others. A list of 151 names was compiled following approaches to a business mentor organisation and to business professionals (e.g. venture capitalists, science park managers) plus referrals from the investors identified by these two sources. Contact with these individuals led to completed face-to-face interviews with 59 of them, comprising 38 active and 21 potential business angels. The active angels had made a total of 155 investments in unquoted companies and 20 investors had exited from 49 of them. It is these investors and these exits that are the subject of this paper.
A number of limitations to the study should be noted at the outset. The first, and most significant, limitation is that the exit information is not deal specific but is only investor specific. Second, the number of exits is relatively small. This reflects the inherent difficulties in identifying business angels, the small population of business angels that exist in a country the size of Finland (5 million population) and the underdeveloped nature of its equity culture. Indeed a formal venture capital industry has only been in existence since the late 1980s. Thus, the concept of making informal venture capital investments is relatively new. The small number of exits prevents any statistical analysis from being undertaken. Third, the sample is likely to be biased towards the more active business angels in Finland. As such, these investors may have a high average number of exits. Fourth, there may be a bias in favour of investors with a strong interest in investing in technology businesses because of the networking sources used to identify business angels.
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