Measuring business angel investment activity in the United Kingdom: a review of potential data sources

Abstract

Business angels play a critical role in the creation of an entrepreneurial climate. However, measuring business angel investment activity on either a cross-sectional or time series basis is extremely problematic. This paper reviews various approaches to measuring business angel investment activity: simple extrapolations, supply-side approaches, demand-side approaches, hybrid approaches, investment-oriented approaches, tax incentive schemes and angel syndicates. It advocates that all developed countries should produce time series data on business angel investment activity to provide policy-makers with an overview of the financing environment and to monitor the effects of interventions in the market. This requires a clear definition of a business angel and a focus on investments rather than investors. The paper recommends a multi-methods approach to collecting data on the UK business angel market.

Keywords:

• business angels
• definitions
• measurement
• angel syndicates
• business angel networks (BANs)

Acknowledgements

This paper is based on a study undertaken on behalf of the UK Small Business Service, entitled Developing time series data on the size and scope of the UK business angel market by C.M. Mason and R.T. Harrison, July 2008. We are grateful to the members of the Small Business Investment Taskforce for their comments and insights at steering group meetings. The views and opinions expressed in the paper are solely those of the authors and should not be regarded as representing the view of HM Government. This paper was blind reviewed by three reviewers.

Notes

1.There is a tendency to assume that national venture capital statistics are an accurate measure of investment activity by the institutional venture capital industry and therefore to use them uncritically. However, a study of the membership of the Swedish Venture Capital Association challenged its representativeness – and hence the accuracy of its statistics – noting that it includes some firms that are not proper venture capital investors and excludes some important investors. The effect is to understate the amount of early-stage investments (Karaomerlioglu and Jacobsson 2000).

2.Mason and Harrison (1994, 73–5) noted that response varied quite markedly by type of list, with the most productive being those lists that targeted investors making more speculative types of stock market investments (e.g. on junior stock markets).

3.The best fit model was the one based on the interaction of the sample generated by entrepreneurs and that generated by local business professionals. The model was as follows:

• where m_ijk is the maximum likelihood estimate of the expected cell count in cell ijk; μ_1(i) μ_2(j) and μ_3(k) are the main effects of the first, second and third samples respectively; μ_23(jk) is the interaction term reflecting the two-factor effect between the first and second samples.

4.The application of rare event econometric techniques may go some way to addressing this particular weakness.

5.The Mission Statement of what became known as the SME Financing Data Initiative ‘is to be a world class, cutting edge program which builds a comprehensive knowledge base of timely and unbiased information on SME financing in Canada. This critical knowledge will help foster an environment which supports the growth of Canadian SMEs by fuelling the public policy debate and bringing clarity to the SME financing market. We do this in an environment of professionalism, transparency and interdepartmental cooperation.’

6.This is a wider category of organisations than business angel networks (or ‘introduction services’) and also includes organised angel groups.

7.For example, it has been suggested that the 30% maximum shareholding and the requirement to invest in ordinary shares will bias EIS investments in favour of smaller and earlier stage investments.

8.For example, Mason and Harrison (2003) have argued that the Regional Enterprise Funds, which were introduced on the basis of the view that there was a gap in the availability of risk capital for amounts of under £250,000 may have been unnecessary because of the significant – but unquantified – role of business angels and angel syndicates in making this type of investments.