Master Thesis MIKE-E
ABC of Danish Business Angels – A typology based analysis Aalborg University
MASTER THESIS
Flemming Staun & Simon Stieper
[aBC of danish business angels]
[A typology based analysis]
Title Sheet
ABC of Danish Business Angels – A typology based analysis
Supervisor: Jesper Lindgaard Christensen (Aalborg University)
Flemming Staun
Simon Stieper
Master Thesis
Aalborg University, MIKE-E, December 2008
Table of Contents
List of Tables 6
List of Figures 7
Executive Summary (in Danish) 8
1. Introduction 9
2. Problem Background 11
3. Problem Statement 15
4. Methodology 18
4.1. Empirical Approach 18
4.2. Data Collection 19
4.3. Theory and Literature 20
5. Defining Business Angels 22
5.1. Definitions 22
5.2. Restricting the Data to Match the Definition 29
6. Earlier Studies of Business Angels 31
6.1. General Overview 31
6.2. The Concept of “Attitudes, Behaviour and Characteristics” 35
6.2.1. Reviewing Articles 35
6.2.2. Defining the ABC Model 40
6.3. Typology Review 43
6.3.1. Six Generic Types of Investors 44
6.3.2. Typologies Based on Investment Activity 44
6.3.3. Typologies Based on “Data Mining” 46
6.3.4. Typologies Based on Investment Strategy 47
6.3.5. Establishing a Typology 48
7. Theory 52
7.1. Agency Theory 52
7.1.1. Separation of Ownership and Control 53
7.2. Social Capital Theory 56
7.3. Proximity Theory 57
8. Hypothesis Development 60
9. General Characteristics (C) 69
10. Hypothesis Testing 72
10.1. H1: BAs prefer to invest in geographically proximate firms 72
10.1.1. H1 a: Early stage BAs are more likely to invest in geographically proximate firms than late stage BAs. 75
10.2. H2: Early stage BAs are to a higher degree actively involved in investee firm than late stage BAs 78
10.3. H3: BAs are more likely to invest in firms in which they have a prior positive relation to the entrepreneur. 82
10.4. H4: BAs are more likely to engage in investments where the source of the investment possibility is their personal network. 85
10.5. H5: Early stage BAs take a larger share of stocks than late stage BAs. 86
10.6. H6: Early stage BAs tend to have fewer unquoted firms in their portfolio than late stage BAs 90
10.7. H7: Late stage BAs tend to invest a higher proportion of their total investment-willing capital in unquoted companies than early stage BAs. 93
10.8. H8 : Early stage BAs spend less time on due diligence/investment opportunity evaluation than late stage BAs. 97
10.9. H9: Late stage BAs engage in syndicated investments to a higher degree than early stage BAs. 100
10.10. H10: Intrinsic rewards are an important motivation factor in the initial decision to become a BA 103
10.11. H11: Early stage BAs are more likely to find it important to support the next generation of entrepreneurs than late stage BAs 106
11. Attitudes & Behaviour of Danish Business Angels 108
11.1. General 108
11.2. Types 110
12. Source Criticism 112
13. Conclusion 114
14. Implications 116
Appendix I - General Characteristics 118
Appendix II - List of ABC elements: 122
Appendix III – Complete Survey Summary 124
References: 139
List of Tables
Table 1 – Activity in Firm vs. Syndication Activity 29
Table 2 - Dimensions of Proximity 57
Table 3 - Total Wealth (binary) 67
Table 4 - General Characteristics - Significance Tests 69
Table 5 - Importance of Geographical Distance (q14) 72
Table 6 - Preferred Location of Firm (q15) 73
Table 7 - Geographical Distance (q14) - Importance by Types 75
Table 8 - Preferred Geo. Distance (q15) - by Types 76
Table 9 - Logit Regression - Types & Geo. Distance 77
Table 10 - Time Spent with Investee Firm (q20) 78
Table 11 - Assistance in Development of Business Plan (q28) 80
Table 12 - Participation in Daily Work 81
Table 13 - Experienced Degree of Trustworthiness (q19) 82
Table 14 - Lack of Trustworthiness (q41) 83
Table 15 - Preferred Share of Ownership (q17) 87
Table 16 - Preferred Share of Ownership (q17 - collapsed) 87
Table 17 – Preferred Share of Ownership (Binary) 88
Table 18 - Portfolio Size (q21) 90
Table 19 - Portfolio Size – (q21 by Type) 91
Table 20 - Edited Portfolio Size (q21) 92
Table 21 - Share of Financial Wealth Willing to Invest (q31) 94
Table 22 - Share of Capital Expected to Invest in Unquoted Firms (q32) 94
Table 23 - Average Shares of Total Wealth that BAs Are Willing to Invest in Unquoted Firms 95
Table 24 - Mean Proportions of Total Wealth Willing to Invest in Unquoted Firms. 95
Table 25 - Time Spent (on average) on Due Diligence (q40) 98
Table 26 - Time Spent (on average) on Due Diligence (q40 Binary) 98
Table 27 - Number of Syndicated Investments (q42) 101
Table 28 - Number of Syndicated Investments within Types (q42) 101
Table 29 - Personal Satisfaction as Motivation Factor (q27) 104
Table 30 - Support Next Generation of Entrepreneurs (q27) 106
Table 31 - Support Next Generation of Entrepreneurs (revised) (q27) 107
List of Figures
Figure 1 - Project Design 21
Figure 2 - Definitions of ‘BAs’ and ‘informal investors’ 24
Figure 3 – Different Investment Roles. 25
Figure 4 - Syndicated Investments 27
Executive Summary (in Danish)
Formålet med dette projekt er at tilvejebringe viden om danske business angels. Uformel venture kapital anslås til at udgøre en betragtelig del af det totale danske marked for risikovillig kapital. Desuden er det en generel opfattelse, at business angels udover at tilføre kapital også tilfører virksomhederne eller iværksætterne en høj grad af viden, erfaring og forretningsmæssige kompetencer.
I dette projekt undersøges begreberne ABC (Attitudes, Behaviour og Characteristics) for danske business angels på baggrund af data indhentet af Vækstfonden i 2002. Begreberne dækker over en lang række elementer som forklarer business angels’ investeringsadfærd. Desuden undersøges heterogeniteten iblandt business angels gennem en analyse af forskellene mellem to typer op delt på præference mht. virksomhedernes udviklingsstadie – henholdsvis tidlige og senere faser.
For at analysere business angels med mulighed for at kunne sammenligne med studier fra andre lande, er det vigtigt at blive enige om en fælles definition. En sådan foreligger ikke på nuværende tidspunkt, hvilket svækker forskningen på området. I dette projekt opstilles overvejelser og forslag til en definition af business angels der er passende i forhold til datagrundlag og analyse. Endvidere finder vi i dette projekt, at der synes at være forskelligheder i brugen af teori til at forklare investeringsadfærden blandt business angels. Disse forskelligheder skyldes delvist manglerne af en fælles accepteret definition, men ligeledes også teoriernes begrænsede evne til at forudsige denne adfærd. I dette projekt benyttes forskellige teorier (bl.a. omfattende agentteori og socialkapital teori), som også findes at være begrænsede i deres evne til at dække området.
Den generelle karakteristik af danske business angels er meget lig andre europæiske lande, dog ser de danske business angels ud til at være en smule yngre. Desuden har danske business angels typisk en længere investeringshorisont i forhold til deres skandinaviske kollegaer. Som i andre lande er de danske business angels kendetegnet ved at være midaldrende mænd med en stor personlig formue, som typisk er erhvervet gennem salg af egen virksomhed. Endvidere er de veluddannede, har ledelsesmæssige kompetencer og har meget erfaring inden for opstart af virksomheder.
De danske business angels foretrækker at investere lokalt og i Danmark. De er typisk motiverede af en blanding af økonomiske incitamenter og personlig tilfredsstillelse. De danske business angels bruger varierende mængder af tid på due diligence når de gennemgår investeringsmuligheder og på den aktive deltagelse i de virksomheder de investerer i. Desuden findes der forskelle i måden hvorpå danske business angels er involveret i virksomheden. Kun en del af den samlede formue bliver investeret i unoterede virksomheder idet danske business angels også typisk foretager andre typer investeringer. Uformelle venture kapital investeringer resulterer oftest i en ikke-bestemmende ejerandel i virksomheden. Generelt er danske business angels meget villige til at indgå i syndikerede investeringer sammen med andre investorer.
Nogle af de undersøgte aspekter inden for ABC afslørede forskelle mellem de to typer af business angels som bliver analyseret. Dette beviser i nogen grad at de danske business angels udgør en heterogen gruppe. Især mht. geografisk beliggenhed, ejerandele, typen af aktiviteter og motivationsfaktorer blev der fundet forskelle. Analysen viser dog, at der højst sandsynligt findes adskillige typer der kan underbygge heterogeniteten.
1. Introduction
Throughout the most recent decades focus on the transfer of knowledge and competences as drivers of innovation has increased. Different studies have shown that innovation is a key factor in the creation and sustainability of new entrepreneurial ventures which in turn leads to the creation of jobs. Furthermore innovation has been shown to play an important role in regional (and national) development and economic growth.
As a source of capital and knowledge, institutional venture capital investments are regarded an important asset. However a shortage of risk capital has recently been found to exist in several countries (Lumme et. al. 1998). Furthermore the relatively large transaction costs of institutional venture capital investments limits the investments to a certain minimum size, which has led to the discussion of the existence of a so-called capital gap. This means that early stage companies might have difficulties attracting knowledge-intensive equity capital.
It has been stated that informal venture capital investors, i.e. private individuals who offer risk capital to unlisted companies in which they have no previous formal or family-related connections, have the ability to offset some of these problems. Furthermore Business Angels (BAs) are believed to be a very important asset to the creation and development of early stage companies. BAs are a special group within the group of informal investors who are very active investors with a high degree of experience and who provides highly knowledge-intensive capital.
In this project, the attitudes, behaviour and characteristics of Danish BAs are investigated. Not much is known about the BAs in Denmark; however this project sheds some light on the general characteristics of these. Earlier studies of BAs have regarded these as being a homogenous group, however recent research has shown that they are in fact heterogeneous. The heterogeneity of Danish BAs is investigated as well as a discussion of the method of analysing different areas of BAs.
The main findings of this project are in line with studies of BAs from other countries such as Sweden, Norway, Wales etc. The demographic characteristics of Danish BAs are very similar to those found in other studies i.e. male, middle-aged, and well-off with a high degree of entrepreneurial experience. Furthermore the heterogeneity of Danish BAs seems evident in several areas of investment strategy and preferences.
Another important finding of this project is the lack of a systematically oriented analysis method for analysing the BAs with a dynamic view i.e. analysing whether BAs follow certain life-cycles regarding their preferences etc. Most research analyse BAs at a certain point in time, without making follow-up analysis to investigate developments on the individual level.
This project is a master thesis from the University of Aalborg, Denmark within the study of MIKE (Master of Innovation, Knowledge and Economic Dynamics) and is in line with the main areas of research of this education, given the close relation between the study of BAs and Entrepreneurial, Innovation, Knowledge and Economic research.
2. Problem Background
During the last decades there has been a growing interest in especially BAs, but also in venture capital in general, from the policy makers’ view and many recognize the importance of the capital supply as important to the economic development.
“There is now growing appreciation of the key role of venture capital in innovation, job creation, economic growth and industrial renewal in a wide range of geographical contexts. This grows out of a broad consensus of opinion that recognizes that entrepreneurial activity is crucial for economic development. Venture capital plays a key role in the entrepreneurial process by providing equity capital and managerial support for young, rapidly-growing private companies with the potential to develop into significant global businesses. It is the small minority of fast-growth companies that is responsible for generating a significant proportion of new jobs and economic growth in an economy” (Harrison & Mason, 1999).
This quotation reflects very well the importance of the venture capital for innovation and economic development in general. Innovation and knowledge creation are important aspects of a knowledge-based economy as the Danish. Not only do we rely on a high educational level in Denmark, but innovative capabilities are also believed to be key factors for the survival of Danish firms. Therefore the capital supply for especially the small firms, which are typically believed to have the greatest growth potential, is vital to innovation. But if innovation and new thinking are to be the driving forces in the Danish economy, the access to a well-functioning market of venture capital for the innovative companies is very important (Vækstfonden, 2006).
Regarding the capital market The Danish Ministry of Economic and Business Affairs (in collaboration with a range of other ministries and councils) publishes a status report on the well-being of Danish economy every year. This report treats the functioning of the financial markets and because of the political focus to investigate how risk-willing capital can support growth companies, the supply of venture- and buy-out[1] capital is naturally reviewed (Økonomi- og Erhvervsministeriet, 2008 ff). Even though these amounts have increased during the last years Denmark is still trailing behind e.g. Sweden or Great Britain with an actual investment level of approx. 0.3 % of GDP[2].
This figure denotes the share of institutionalised venture capital investments, which are only part of the total venture capital supply. Informal venture capital investments are believed to constitute a substantial share of the total market however the exact amount is unknown. The informal venture capital amount may even exceed the amount of formal venture capital investment; especially regarding companies in the early phases (Vækstfonden, 2002). Therefore, there have been many attempts to estimate the market size of informal venture capital. Mason & Harrison (2000), for instance, tried to estimate the size of the UK market by aggregating the visible part of the market (the network) with assumptions about the proportion of BAs participating in the market. This resulted in an estimated market size of 20,000 to 50,000 investors investing between £500 million and £2 billion. Some criticism has been attached to this (imprecise) method and more sophisticated estimates are highly needed – especially if the goal is to determine cyclical trends or just the ongoing development (Harrison & Mason, 1999). The Danish informal venture capital market could have a proportionally similar size but this has not yet been further investigated.