The mobility of informal venture capital: the Scottish experience (258)

Theme Track: Sectoral Changes and New Markets - Advanced Producer Services

Authors:
Paul, Stuart ; Whittam, Geoff ; Johnston, Jim

Raising finance is of paramount importance to small medium enterprises (SMEs). It is particularly difficult for new ventures and small growing businesses which are perceived to be high risk and hence unattractive to traditional lenders. Additionally, traditional lenders are clustered in specific geographic locations which can add to the problems of this high risk group. There is a high degree of spatial concentration of both venture capital firms in core regions and a comparative lack of investments in SMEs in the more peripheral regions of Europe. Nevertheless, new ventures and small growing businesses are deemed essential by policy makers in the creation of entrepreneurial culture and economic competitiveness. Our research confirms that business angels prefer to invest close to their base. The question which we pose is whether angels offer a potential solution to close this regional equity gap.

Scotland is located at the edge of Europe and therefore can be regarded as a peripheral region. To maintain its competitive position Scottish Enterprise, the economic development agency for Scotland, has for the last decade been operating a Business Birth Rate Strategy (BBRS). A review of the BBRS has recently taken place and concluded that its outcomes have been disappointing.

This paper analyses investment decisions of business angels operating in a peripheral economy. First, it assesses the geographic parameters of the investment decisions of business angels. Second, it analyses the financial capacity of business angels and links this to the wider issue of the development of an entrepreneurial culture. Third, it assesses the added value business angels bring to new ventures and small growing businesses in addition to their financial investment. It argues that, if an entrepreneurial development strategy in a peripheral economy is to be successful, then harnessing the expertise of business angels may be a significant factor in achieving this.

The research has the support of three sponsors: LINC Scotland, the development organisation which has the task of fostering the business angel movement in Scotland; Archangel, Scotland's oldest angel investment syndicate, and the Bank of Scotland. A survey questionnaire of 476 angels achieved 142 replies, a response rate of thirty per cent. Two thirds of respondents stated that they prefer to make investments within a two hour journey time of their base. Moreover, a large majority of angels believe that they have brought benefits in addition to finance to the businesses in which they have invested.

The survey questionnaire is being followed by in-depth semi-structured interviews to analyse the qualitative issues which affect the mobility of informal venture capital. A synthesis of the findings of these interviews and the quantitative data from the survey questionnaires will be presented at the conference.

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