Academic journal article Entrepreneurship: Theory and Practice

Do Serial and Non-Serial Investors Behave Differently?: An Empirical and Theoretical Analysis

Academic journal article Entrepreneurship: Theory and Practice

Do Serial and Non-Serial Investors Behave Differently?: An Empirical and Theoretical Analysis

Article excerpt

Internationally, the economic importance of small entrepreneurial firms has been widely recognized. In the US and other major industrial nations a transition has occurred from decaying industrial economies to emerging entrepreneurial economies (Wetzel, 1996). "In the US, from 1979 to 1995, while Fortune 500 payrolls declined by over 4 million jobs, the entrepreneurial economy generated over 24 million jobs. About seventy-five percent of these jobs were created by fewer than 10% of small firms." (Freear, Sohl, & Wetzel, 1997, p. 47) Likewise in the UK, small firms are a major economic force and have been the subject of some recent policy initiatives. But all small firms are not alike. The small minority of firms that have such economic potential are entrepreneurial ventures that can be distinguished from the others by their growth potential rather than size. Because they have a vision of rapid growth of at least 20% annually, they are able to attract external suppliers of equity capital (Wetzel & Freear, 1994).

Despite their considerable potential, these entrepreneurial firms often have difficulties obtaining outside equity capital. Because they are often in the early stage of development and have little or no track record or collateral, they are seen as risky investments by banks and other lending institutions (Mason & Harrison, 1996). For venture capital firms, these firms are also unappealing since their funding requirements are well below the venture capitalist's minimum investment threshold. Furthermore, they also require too much active hand-holding, their returns are risky and uncertain, and any foreseeable exit route at the time of investment is unlikely (Gupta & Sapienza, 1988; Norton, 1995).

Primarily due to the reluctance of banks and venture capital firms to fund early-stage entrepreneurial firms, an equity gap exists for their funding (Freear et al., 1997; Mason, 1996a).

The Importance of Business Angels

Business angels (also known as private equity investors) are the primary source of finance that is attempting to fill this equity gap (Coveney & Moore, 1997; Harrison & Mason, 1996; Wetzel & Freear, 1994). They are private individuals who have substantial sums of finance available to fund entrepreneurial firms.

The potential of business angels and the informal venture capital market is enormous. They have been identified as the largest single source of risk capital for entrepreneurial companies, far exceeding the venture capital industry (Wetzel, 1993; Wetzel & Freear, 1994; Mason & Harrison, 1993). In the US, it is estimated that business angels finance 30-40 times as many firms as the institutional venture capital community (Gaston, 1989; Wetzel & Freear, 1994). Business angels invest around $10-20bn per annum in around 30,000 businesses, whereas venture capitalists fund around $3-4bn per annum in around 3,000 businesses (Wetzel, 1996). Similarly in the UK, business angels are estimated to invest about [pounds]2bn per annum in small entrepreneurial firms, compared to about [pounds]1bn per annum for the institutional venture capital market (Mason & Harrison, 1992, 1993). However, more recent research shows that the amount provided by business angels may be significantly greater than these estimates (Van Osnabrugge, 1998; Stevenson & Coveney, 1994). But, due to the invisibility of the business angel marketplace, these are only 'ball park' estimates and should not be regarded as definitive (Freear et al., 1997: Mason, 1996b).

In addition to the already greater influence of the informal venture capital market over the formal venture capital market, business angels have even greater unutilized finance potential than these figures suggest (Mason & Harrison, 1993, Coveney & Moore, 1997). Research shows that angels have up to three times more capital available for investment than what they have already invested, but what primarily restricts them is the availability of good investment opportunities and the right policy incentives (Mason & Harrison, 1993; Freear et al. …

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