Determinants of long-distance investing by business angels in the UK

Abstract

The business angel market is usually identified as a local market, and the proximity of an investment has been shown to be key in the angel's investment preferences and an important filter at the screening stage of the investment decision. This is generally explained by the personal and localized networks used to identify potential investments, the hands-on involvement of the investor and the desire to minimize risk. However, a significant minority of investments are long distance. This paper is based on data from 373 investments made by 109 UK business angels. We classify the location of investments into three groups: local investments (those made within the same county or in adjacent counties); intermediate investments (those made in counties adjacent to the ‘local’ counties); and long-distance investments (those made beyond this range). Using ordered logit analysis the paper develops and tests a number of hypotheses that relate long-distance investment to investment characteristics and investor characteristics. The paper concludes by drawing out the implications for entrepreneurs seeking business angel finance in investment-deficient regions, business angel networks seeking to match investors to entrepreneurs and firms (which are normally their primary clients), and for policy-makers responsible for local and regional economic development.

Keywords:

• business angels
• informal investment
• distance
• regional development
• venture creation

Acknowledgement

The authors are grateful to one of the reviewers for some very helpful observations on how to improve an earlier draft of this paper.

Notes

1. There is a specific exception to this hypothesis to cover the case where a local investor brings in non-local investors with deeper investment pockets and/or specific investment-related expertise: we discuss this ‘lead investor’ case in Hypothesis 11.

2. There is an implication here that the location of an angel's investments will change over time, with active investors becoming progressively more oriented to distant investments; however, the dynamics of this cannot be tested from the present data set.

3. In order to keep the names and addresses of their investors confidential BANs were supplied with stamped envelopes containing the questionnaire, covering letter and FREEPOST reply envelope which they addressed and posted to their investors.

4. Those registered with BANs also include financial institutions, companies and intermediaries (registering on behalf of clients).

5. Copies of the questionnaire are available on request from the authors.

6. Investor respondents were asked to indicate for each investment reported whether it was a technology-based investment or not. Although self-report data, this is no less reliable than investor-classified industrial/sector data, which in any case will not signal unequivocally technology-based investments in otherwise non-technology sectors.

7. The correlation matrix is available upon request from the authors.