Informal Venture Capital and the Financing of Small and Medium-Sized Enterprises

Abstract

There are two principal sources of venture capital for entrepreneurial companies. The institutional venture capital market, comprising professional venture capital firms, if the more familiar. However, despite its high profile it actually finances only a small number of businesses. Moreover, its investment focus favours larger, established businesses, including management buyouts, rather than new and recent start-ups. Much less visible - but considerably more significant as a source of finance for entrepreneurial companies - is the informal venture capital market comprising private investors (or ‘business angels’) who provide risk capital directly to new and growing companies. Drawing upon research undertaken in North America and Western Europe, this paper addresses three questions: (i) Who are business angels and how does the informal venture capital market function? (ii) Why is the informal venture capital market important to the development of an entrepreneurial economy? (iii) How can governments stimulate informal venture capital activity.

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