A review of sampling and definitional issues in informal venture capital research

Abstract

This paper presents the argument for broadening the definition of informal venture capital populations and improving sampling methodologies for informal venture capital research. It is argued that the widely enumerated difficulties regarding sampling methods are driving the definition of a business angel. Sampling difficulties such as unknowable populations limit the ability of researchers to study (survey) business angels. This limitation precipitates narrow definitions of business angels in order to justify the sampling method used. The more narrow definition ultimately results in precluding various cohorts of angels from appearing in the data. This paper reviews a range of studies, their definitions and methodologies, and speculates on the angel cohorts that chosen methodologies may exclude. The paper proposes a protocol that adopts a broad definition of informal venture capital, and a sampling method that produces a more representative range of informal venture capital investors. The method samples from a known population, namely publicly available business registration data, to create a representative sample of business angels. A broad definition and a representative sampling method allow comparisons and generalisable results that current sampling methods preclude. The conclusion highlights that standardised definitions and representative samples will allow studies to make reliable comparisons across types of informal investors, such as family, friends, arch angels and micro-investors.

Keywords:

• business angel
• venture captial
• sampling
• definition
• trends
• entrepreneurial finance
• measurement
• personal ralationships
• policy
• incorporation

Notes

1. BISs are member organisations that have staff who perform functions related to the introduction of entrepreneurs and angels to each other. These functions may include helping entrepreneurs prepare their materials or presentations, preparing abbreviated materials for angels, and vetting entrepreneurial candidates prior to introduction. They can be government supported in part or privately operated. BANs are collections of like-minded individuals who meet at their own behest to vet entrepreneurial opportunities for possible investment. They are not professionally run or sponsored. BANs may elect some of their colleagues to conduct preliminary due diligence investigations before bringing entrepreneurial opportunities to the larger group.

2. We thank an anonymous reviewer for making this observation.

3. A workshop conducted by Industry Canada and the Canadian Department of Finance consulted with angel scholars about conducting a general population survey. The cost of such a survey was estimated by Statistics Canada, the data gathering branch of the Government of Canada, to be at least CDN $1 million (US$1,040,000).

4. In regions where these are available, not all businesses started are eligible for the tax incentives as certain restrictions apply and approvals are necessary.

5. In the UK, company registrations are very transparent and are overseen by Companies House ( www.companies-house.gov.uk/) which provides company registration information, ‘company directors' details’, and document images for a monthly subscription fee (Company Information at your Fingertips 2003; 2006: Companies House Direct – UK Government). In the US, Secretaries of State provide detailed company information, but a review of a small number of highly populated states such as New York and California did not produce any information about directors of the firms.

6. The US, UK and Canada offer same-day incorporation services given a small amount of specific information. The US Secretaries of State and Canadian registrars do not note any minimum equity requirements for new private incorporations. Companies House, the UK registrar, specifies specifically that ‘no minimum share capital for private limited companies’ is required ( www.companieshouse.gov.uk/about/gbhtml/gba6.shtml retrieved June 2, 2006).

7. In Canada, the companies' original listings and files remain on record long after companies have dissolved or have ceased paying for their registration. Therefore, research designs of any period, or age of firm, can be accommodated. However, the older the sample desired the more likely survival biases will be. Even through the addresses and persons associated with the company are still listed, their addresses and details may have subsequently changed.

8. This observation was proffered by an anonymous reviewer.

9. This suggestion was proffered by an anonymous reviewer.