This is the first study to have examined the exits of business angels. However, the study is based on an extremely small sample and so conclusions must inevitably be tentative. The findings are, nevertheless, valuable insofar as they provide evidence on a key aspect of venture capital activity where no previous information existed. Two further limitations of the study should be borne in mind. First, we only use one simple measure of exit success. A more appropriate measure would be based on actual cumulative cash flows (although it might be difficult to obtain such data from private investors). This would also allow an analysis to be made of portfolio returns which is likely to be more relevant, as the modus operandi of venture capital investing is that a small number of very successful investments should more than offset those which lose money or break even. Second, the evidence relates to investors not investments. While it has been possible to build up a generalised picture of the investment behaviour of successful and unsuccessful investors on the basis of their overall investment activity (either all investments or current portfolio) the implicit assumption has been that the exited investments were not atypical. Deal-specific information is required in order to make further progress in understanding the investment performance and exit activity of business angels.


The key findings can be grouped under two headings. The first set of findings relate to aggregate investment performance. The investors in this study achieved a positive return on only about one-third of their investments. However, about 1 in 5 of all investments were very successful, generating an IRR of over 20%. Investments by private individuals in unquoted companies can therefore be very profitable. In this sample of Finnish business angels the exit success has been similar to that for professional venture capital funds. However, this is an inexact comparison because the exits by business angels have been achieved over a number of years whereas the venture capital exits refer to a single year. The most common ways in which business angels harvest their successful investments are by means of a trade sale or sale to a 3rd party. Loss-making investments are normally sold to existing shareholders in the business.


The second set of findings relates to the identification of differences between investors in terms of their investment success. This study identified two small groups of investors. One group of six investors had achieved 10 exits, all of which were successful, and another group of 8 investors who had made 17 exits, none of which were successful. A number of differences were identified between these two groups of investors:


(a) successful investors have spent more of their career in top management positions in large companies and in middle management posts whereas unsuccessful investors have spent longer in top management positions in small companies. However, it is unclear how previous work experience relates to investment success. Possible links are with the ability to evaluate investment opportunities or in managing the investment.


(b) in terms of their motivations for investing, successful investors gave greater emphasis to the fun and satisfaction of being involved with entrepreneurial ventures, whereas unsuccessful investors gave greater emphasis to altruistic and social responsibility motives


(c) successful investors had a larger flow of investment opportunities and made fewer investments, implying that they are more selective in making investments


(d) unsuccessful investors were more likely to derive deal flow from friends and to invest in friends' businesses


(e) unsuccessful investors had a higher estimation of their value-added contribution to the businesses in which they invest


However, because of the nature of the data upon which this study is based establishing causality is problematic. Are business angels with a successful investment performance successful because of the superior quality of their flow of information on investment opportunities, because of their approach to investing or because of the value-added contribution that they make to their investee businesses? Nevertheless, even without being able to answer this question the findings from this study do raise some issues which both investors and entrepreneurs should consider. First, and most important, both parties should consider the wisdom of investing when they are linked by friendship ties. Investors who invest predominantly in friends’ businesses have an unsuccessful investment performance. This may be either because friendship compromises the investment decision or it could be because friendship affects the nature of the post-investment relationship, leading to less value added. Second, investors should extend their investment opportunity referral networks beyond that of their friends: investors who rely on friends for information on investment opportunities have a poor investment performance. whereas successful investing is associated with a large deal flow from a variety of sources. Third, investors who have a poor investment performance should undertake a "reality check" on the value of the contributions that they make to their investee companies: is it as important as they perceive it to be? Finally, entrepreneurs should note that although virtually all business angels have an entrepreneurial background, their work experience can be used to discriminate between successful and unsuccessful investors. Successful investors have a background in top management jobs in large companies whereas unsuccessful have spent much of their time in top management positions in small companies. But of course, having identified such investors there no guarantee that an entrepreneur will be able to convince them to invest in their business.


Aram Research Associates Inc (1987), Informal Risk Capital in the Eastern Great Lakes Region,, Washington D.C.: US Small Business Administration, Office of Advocacy


Bygrave, W.D. and Timmons, J. (1992) Venture Capital at the Crossroads, Harvard Business School Press: Boston.


EVCA (1995) EVCA Yearbook, European Venture Capital Association: Zaventem, Belguim.


Fiet, J.O. (1995) Reliance upon informants in the venture capital industry, Journal of Business Venturing, 10, 195-223.


Freear, J. and Wetzel, W.E. (1990) Who bankrolls high-tech entrepreneurs? Journal of Business Venturing, 5, 77-89.


Freear, J. and Wetzel, W.E. (1992) The informal venture capital market in the 1990s. In Sexton, D.L. and Kasarada, J.D. (eds.) Entrepreneurship in the 1990s , PWS-Kent: Boston, MA., 462-486.


Freear, J., Sohl, J.E. and W.E. Wetzel (1995) Angels: personal investors in the venture capital market, Entrepreneurship and Regional Development, 7, 85-94.


Gaston, R.J. (1989) Finding Private Venture Capital For Your Firm: A Complete Guide, Wiley: New York.


Gaston, R.J. and Bell. S.E. (1986) Informal Risk Capital in the Sunbelt Region, US Small Business Administration, Office of Advocacy, Washington DC.


Gaston, R.J. and Bell, S.E. (1988) The Informal Supply of Capital, US Small Business Administration, Office of Advocacy, Washington DC.


Haar, N.E., Starr, J. and MacMillan, I.C. (1988) Informal risk capital investors: investment patterns on the East Coast of the USA, Journal of Business Venturing, 3, 11-29.


Harrison, R.T. and Mason, C.M. (1993) Finance for the growing business: the role of informal investment, National Westminster Bank Quarterly Review, May, 17-29.


Harrison, R.T. and Mason, C.M. (Eds) (1996) Informal Venture Capital: Evaluating the Impact of Business Introduction Services, Woodhead-Faulkner: Hemel Hempstead.

Landström, H. (1992) The relationship between private individuals and small firms: an agency theory approach, Entrepreneurship and Regional Development, 4, pp.199-223.


Landström, H. (1993) Informal risk capital in Sweden and some international comparisons, Journal of Business Venturing, 8, pp 525-540.


Mason, C M and Harrison, R T (1994) The informal venture capital market in the UK, in A. Hughes and D.J. Storey (eds) Financing Small Firms, Routledge: London, pp 64-111.


Mason, C.M. and Harrison, R.T. (1995) Informal venture capital investment activity through business introduction services: is there still a role for public policy? paper to the 15th Babson College-Kauffman Foundation Entrepreneurship Research Conference, London Business School.


Mason, C.M. and Harrison, R.T. (1996), Informal venture capital: a study of the investment process and post-investment experience Entrepreneurship and Regional Development., 8, forthcoming.


Mason, C. and Lumme, A. (1995) The value-added impact of business angels, paper to the 5th Global Entrepreneurship Research Conference, Saltzburg.


Mason, C. and Rodgers, A. (1996) Understanding the business angel’s investment decision, University of Southampton, Venture Finance Working Paper No. 14: Southampton.


Riding, A., Dal Cin, P., Duxbury, L., Haines, G. and Safrata, R. (1993) Informal Investors in Canada: the Identification of Salient Characteristics, Carleton University: Ottawa.


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Tymes, E.R. and Krasner, O.J. (1983) Informal risk capital in California, in J.A. Hornaday, J.A. Timmons, and K.H. Vesper (eds) Frontiers of Entrepreneurship Research 1983, Babson College: Wellesley, MA, pp. 347-368.


Wetzel, W.E. (1981) Informal risk capital in New England, in Vesper, K.H. (ed) Frontiers of Entrepreneurship Research 1981, Babson College: Wellesley, MA, pp. 217-245.


Wetzel, W.E.jnr (1987) The informal risk capital market: aspects of scale and efficiency, Journal of Business Venturing, 2, pp 299-313.


Wetzel, W.E. and Seymour, C. (1981), Informal Risk Capital in New England, US Small Business Administration, Office of Advocacy: Washington DC.

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