The financing of entrepreneurial firms in the UK : a comparison of business angel and venture capitalist investment procedures
Although just a minority of all small firms in the UK, high-growth entrepreneurial ventures are becoming widely recognised for their role in job growth and economic prosperity. However, due to their inherently high-risk nature, many of these early-stage firms experience difficulty in securing outside finance from institutional investors, which ultimately limits their growth and economic potential. Fortunately, two investor types, business angels (BAs) and venture capitalists (VCs), do fund a small proportion of these entrepreneurial ventures, although they, especially BAs, often have much more financial capital available for such investments. Since many aspects of BA and VC investment processes remain unknown, it is hoped that a better understanding of how and why these investors fund particular investments may aid in further lessening the entrepreneurial funding problem. This research study, therefore, conducts the first-ever detailed comparison of the investment criteria and procedures of these two financiers across the full investment process. To make the study more robust, a theoretical base is adopted (based on agency theory) to form research hypotheses which propose that BAs and VCs in the UK may use different approaches to limit potential agency risks in their investments (i.e. the risks associated with an entrepreneur's potential misuse of the investor's money). Utilising data from 40 personal interviews and 262 questionnaire responses, this study empirically supports the main hypothesised notion that, although both investors reduce agency risks at all stages of the investment process, BAs place more emphasis on doing so ex-post investment (the incomplete contracts approach), whilst VCs stress doing so more ex-ante investment (the principal-agent approach). In supporting the hypothese, empirical information is gathered about each investment stage and each investor group's heterogeneity. Possible implications of these findings are then discussed in the hope of aiding, no matter how slightly, the funding efficiency of small entrepreneurial firms.