Angel investing: an examination of the evolution of the Finnish market

Abstract

Since the study by Lumme, Mason and Suomi (1998) (Lumme, A., C.M. Mason, and M. Suomi. 1998. Informal venture capital: Investors, investments and policy in Finland. Boston: Kluwer Academic Publishers) more than a decade ago there has been very limited research on Finnish business angels (BAs). Thus, the primary aim of this study is to provide a more up-to-date picture of angel investing in Finland, reflecting market conditions in year 2006. The results are compared to Lumme, Mason and Suomi (1998) who portray the Finnish BA market in year 1994. In order to understand how the market has evolved over the years, the results are analysed with respect to changes in general economic conditions, the stock market development, the financial system, the entrepreneurial landscape and the marketplace for BAs. The current study draws upon interviews with 53 Finnish BAs. The results suggest that Finnish BAs have reduced their exposure to risk by increasing their prevalence to syndicate investments, investing in more mature ventures, holding more negligible shares of ownership, being more strict in their screening and placing more focus on due diligence. However, their involvement in the operations of the companies they fund has declined over the years. The analysis indicates that the change in the marketplace with the greatest impact on market development has been the establishment of a business introductory service. It has increased transparency in the market, and enables the formation of investment syndicates and transferral of investment practices. Based on the results implications are provided for BAs, entrepreneurs and policy-makers.

Keywords:

• business angel
• Finland
• market evolution
• due diligence

Acknowledgement

The author would like to thank Professor Hans Landström from the University of Lund for his valuable help and support.

Notes

 1. The original study was published in Finnish in 1994.

 2. In a market-centered financial system the companies raise capital by the sales of equity rather than raising finance from banks.

 3. Retrieved from www.fvca.fi 23 September 2008

 4. Retrieved from www.tilastokeskus.fi 24 September 2008

 5. The growth is measured as the annual increase in companies' turnover. Only 0.2% of the companies, in year 2005, exceeded an annual growth in turnover of 10%.

 6. Direct investments are subject to personal taxation, where only expenses related to acquisition and maintenance of the capital income (including related interests) can be deducted from capital gains.

 7. Business cycles commonly have a length of ten years. Thus, the deductibility does not necessarily enable investors to offset losses from recession against profits accruing at times of prosperity.

 8. More than 90% of the investments were made in year 2000 or later. Most of the investments studied were made in year 2005 and 2006. The investments made in 2005 accounted for more than one third of the investments featured in this study.

 9. Entrepreneur(s) refer to the entrepreneurial team behind the idea and the management (in established businesses).

10. Retrieved from http://www.kauppalehti.fi/5/i/porssi/omaraha/uutiset.jsp?oid = 20101252175&request_ahaa_info = true 5 April 2011

11. To underline the risks involved in angel investing the Lumme, Mason, and Suomi (1998) study reported that 38% of investments by BAs involved a total loss, a further 18% involved a partial loss and 13% broke even. Similar loss rates have been reported in studies of UK angel investing (Mason and Harrison 2002; Wiltbank, 2009).