Abstract
Innovation is critical for firm and national competitiveness. However, financing innovation is increasingly difficult for early-stage, high-risk projects, as banks and venture capital firms are focusing on later-stage, less risky projects. To fill this gap, US and European entrepreneurs are turning for seed funding to Business Angels (BAs) and Business Angel Networks (BANs). We describe the role of BAs and BANs in the US and Europe from the perspectives of entrepreneurship theory and social network theory. We show how BANs can strengthen ties between entrepreneurs and individual investors under highly uncertain conditions. We also study the links between formal and informal private equity finance, raising wider questions about the funding and performance of clusters of innovation. Finally, we suggest that differences in network characteristics, rather than the availability of projects, explain the large differences in the size and performance of the BA sectors in the US and Europe.
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Notes
- 1.
This uncertainty comes from the difficulty at this time (t = 0) in establishing all the development alternatives possible and determining the probability of each.
- 2.
Startup funding must deal with the same problems facing business finance more generally, namely agency costs and other problems associated with asymmetric information (Denis 2004). These problems are exacerbated during the creation phase.
- 3.
Grants and subsidies include explicit transfers such as US Small Business Innovation Research grants and the various local and regional grants and subsidies provided in Europe, as well as indirect assistance provided by publicly funded or university provided incubators and research parks.
- 4.
A popular aphorism describes these as the “three Fs” (friends, family and fools).
- 5.
- 6.
“Closing gaps and moving up a gear: The next stage of venture capital’s evolution in Europe”, EVCA Venture Capital White Paper, Brussels, 2 march 2010.
- 7.
Summary of private participants in informal capital risk, EBAN
- 8.
In a 2008 study sponsored by the Ministry for Higher Education and Research, and in collaboration with the association France Angels, Ernst & Young documented characteristic patterns of BAs in financing innovative SMEs. “BAs are involved for the most part during the first 2 years of businesses’ existence (42 % of respondents became involved when the business was first created), very often in groups and as minority investors (82 % of participations mentioned were for less than 20 %). They invest in all business sectors but mostly in accordance with their professional background.”
- 9.
In “L’innovation: un enjeu majeur pour la France—Dynamiser la croissance des entreprises innovantes”, Report for the Ministry of Redressement Productif, Jean-Luc Beylat and Pierre Tambourin, April 2013.
- 10.
Potential BAs have never invested in unlisted projects.
- 11.
It should be noted this role is already played by start-up funds and prior to this by incubators. However, not all projects go through these stages.
- 12.
Not all BAs belong to a network and not all networks are in national associations,
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Acknowledgment
We thank Jim Chappelow, Jingjing Wang, and Abel Malik Ola for assistance.
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Deffains-Crapsky, C., Klein, P.G. (2016). Business Angels, Social Networks, and Radical Innovation. In: Bögenhold, D., Bonnet, J., Dejardin, M., Garcia Pérez de Lema, D. (eds) Contemporary Entrepreneurship. Springer, Cham. https://doi.org/10.1007/978-3-319-28134-6_18
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