Business angels are providers of critical early finance to entrepreneurs at the start of new venture development, but they do not only invest money; often they also bring their knowledge, experience, and networks to the new venture. Their motivation as investors is usually different from that of more conventional providers of finance: they are more intrinsically motivated and are more engaged in the act of new venture creation.
Peer influence, experience, and networks
We find that people are more likely to become informal investors when individuals similar to themselves, their peers, within groups defined by age, gender, income, and neighbourhood, have higher levels of entrepreneurial business experience. Such social environments, with a greater density of entrepreneurs, provide more role models as well as greater networking opportunities. This enables potential business angels to form the relevant and appropriate ties critical for access to knowledge and for identifying and obtaining other resources including finance for investment. This works two ways between business angels and entrepreneurs, especially in a digitalised economy. A greater number of entrepreneurs in the peer group also implies that potential informal investors will be more likely to encounter suitable investment opportunities from which to choose.
Moreover, we find that the richness of entrepreneurship competence in one’s peer groups can to some extent offset the disadvantages of the person’s own lacking entrepreneurship experience.
Across our sample of developed and emerging economies, we found economic growth to be associated positively with the likelihood of someone becoming a business angel. Previous research suggests that higher level of development is associated with lower entrepreneurial propensity, which does not seem to apply to informal investment activities. The likelihood of being an angel investor is actually higher in developed economies.
Financial resources are abundant in developed countries; however, the problem is how to channel them towards the most productive uses. Tax incentives may be utilised to encourage private equity and angel investment, and Britain is an example of a country where some measures of this kind are utilised. Yet, given the importance of the social channels of influence we identified, this may need to be accompanied by active drive to promote role models and to facilitate contacts between those with entrepreneurial experience and those interested in private equity finance, including digitally. Moreover, this approach may help to widen participation in some specific social groups defined by location, ethnicity, age, and gender.
We conclude that an important way to make an economy more productive is to facilitate and widen the forms of investment that enable and create change and development; that is by supporting entrepreneurial finance.
Fei Qin is an associate professor and co-director of the Future of Work research centre at the University of Bath. Her research looks at how technological, social, and institutional factors interplay to influence skills, careers, and innovation. Email: firstname.lastname@example.org
Tomasz Mickiewicz is professor at Aston Business School and honorary research fellow at University College London. His research is focused on entrepreneurship, in particular on how formal and informal institutional environment affects entrepreneurial aspirations. Email: email@example.com
Saul Estrin is emeritus professor of managerial economics and strategy and the founding head of the Department of Management at LSE. His research has long focused on the micro-economics of comparative economic systems. His recent work has concentrated on international business strategy issues and entrepreneurship. Email: firstname.lastname@example.org
This article was first published in LSE Business Review
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