Business angels and love money investors: segments of the informal market for risk capital

Abstract

This empirical study reports that returns on informal investments made by business angels are significantly higher than those made by non-angels. However, rates of return on informal investments made by friends and family members of business founders are, on average, dismal. This finding reinforces warnings that it may be counterproductive for public policy to encourage ‘amateur’ informal investors, yet stimulation of value-adding business angel investment seems well advised. The relative sizes, in terms of the annual flow of investment funds, in the main segments comprising the informal market were estimated. Love money accounts for more than three times as much annual investment as business angels, who in turn invest more than twice as much annually – and in many more firms – as institutional venture capitalists.

Keywords:

• business angels
• informal investment
• rates of return

Notes

1.According to Berger and Udell (1998, 629), the level of financial capital invested by business angels ‘considerably understates’ their role. Berger and Udell note that angels provide a relatively higher proportion of funds to growth-oriented firms and that firms that receive angel financing tend to be relatively successful: Moreover, Madill, Haines, and Riding, Jr. (2005) report that business angels provide considerable non-financial value-added in the form of mentoring, networking, hands-on assistance, certification, etc.