Developing Time Series Data on
the Size and Scope of the UK
Business Angel Market.
Colin M Mason
Richard T Harrison
Colin M Mason Richard T Harrison
Hunter Centre for Entrepreneurship Queen’s University Management School
University of Strathclyde Queens University Belfast
Glasgow G1 1XH Belfast BT7 1NN
Scotland Northern Ireland
Tel: 0141 548 4259 Tel: 028 9097 3621
0141 548 3482 028 9097 5025
Fax: 0141 553 7602 Fax : 028 9097 5156
Email: firstname.lastname@example.org E-mail: email@example.com
Executive Summary 1
Author biographies 6
1 Introduction 8
2 The UK business angel market: an overview of previous 15
3 Developing a time-series dataset to measure business angel 30
activity in the UK: definitional issues
4 Data sources for measuring the investment activity of business 34
angels: a critical review
5 Recommendations 60
Appendix 1. Questionnaire used by BANs to report on the 73
investments that they had facilitated.
DEVELOPING TIME SERIES DATA ON THE SIZE AND SCOPE OF THE
UK BUSINESS ANGEL MARKET
This Report was commissioned to identify the importance of business angel
investment in the UK, summarise previous approaches to mapping the scale and scope
of the business angel market, identify new approaches to measuring business angel
activity and assess the implications for policy.
A business angel is defined as an individual acting alone or in a formal or informal
syndicate who invests their own money directly in an unquoted business in which
there is no family connection, and who, after making the investment, takes an active
involvement in the business (as an advisor or board member, for example) directly or
via a co-investor.
There is an important distinction between a business angel per se (‘pure’ business
angel investment) who is, generally, commercially motivated and driven by
expectations that there will be a financial return on the investment (although some
angel investors do on occasion trade-off commercial returns for other social or
altruistic motivations). These meritocratic investors are distinguished from informal
investors, a broader category that includes business angels but also includes investors
motivated by primarily non-commercial motives (particularly family connections),
described as ‘love money’ or affinity investing. While both are important, only ‘pure’
business angel money is potentially available outside family and personal connections
and is the primary focus of public policy interest.
Business angel investment is important to the development of an entrepreneurial
economy. However, in the absence of directories of business angel investors their
invisibility makes difficult the development of accurate estimates of the scale of the
business angel investment market and the identification of trends in that market.
Based on a detailed review of previous research on business angels in the UK and
internationally, the report concludes that research-based knowledge of the business
angel market is ad hoc:
i. it is cross-sectional rather than longitudinal, and as such offers no evidence
on establishing trends in investment activity with any degree of robustness
ii. it is often based on small-scale samples, which creates problems of
generalisability to provide estimates of overall market activity levels;
iii. these samples are more often than not samples of convenience, raising
issues of the extent to which extrapolation can be undertaken when the
representativeness of the sample is unknown;
iv. research is characterised by different definitions of business angel activity,
raising the problem that comparative analysis is not based on a like-with-
v. international comparisons are problematic;
vi. as a result policy decisions are based on partial information.
1. In view of the importance of business angel investment in supporting an
entrepreneurial economy, the Enterprise Directorate should develop
improved time series data on business angel investment activity.
2. Data collection should be based on a consistent rigorous definition of
business angels. The Report defines a business angel as an investor who:
invests their own money, makes their own investment decisions1, is driven
largely by commercial considerations (although some investors may trade
off part of the commercial return for non-financial considerations), is not
making within-family investments, and has a hands-on involvement with
the investee company either themselves or through a co-investor. Separate
data collection and analysis is appropriate to scope out the non-‘pure’
informal investment activity in the UK to provide an overall assessment of
the availability of risk capital.
3. Identifying business angels and the amounts they report to have available
for investment is extremely problematic. Accordingly, the focus of data
collection should be on investment activity – the investments made by
business angels – rather than on the investors themselves. Data should be
collected on both the activities of business angel investors and on the
companies in which the investments are made.
4. The business angel investment market is evolving and the Report notes in
particular the emergence of business angel syndicates as a key part of this
market. Given the increasing significance of angel groups and syndicates,
therefore, the Enterprise Directorate should instigate a regular (annual or
twice a year) survey of angel groups and syndicates to collect information
on their investment activity. As similar information is being collected in
the US and is to be collected in Canada, there is scope for developing
international comparisons in investment levels and trends.
5. Data collection on the business angel market can build on data that already
exists, working with existing data sources so that they can be used to
generate estimates of business angel investment activity. The Report
recommends action on five fronts:
a. Seek changes to the questions in GEM (Global Entrepreneurship
Monitor) about informal investment to include questions about the
b. Encourage BBAA (British Business Angel Association) to increase the
range of data collection from members: while to some extent this
represents the ‘tip of the iceberg’ in terms of market coverage, there is
potential to capture data not otherwise available from other sources
(for example, on valuations, deal structures, co-investment activity).
This includes investors making decisions through a syndicate or upon the recommendation of a lead
investor (or “archangel”) but excludes collective investments through Venture Capital Trusts.
c. Undertake administrative changes to the process in of 88(2) forms by
Companies House to address the limitations of this as a source of data
on market activity. These changes would include: enforcing the
requirement to file; ensuring the completeness of records; requiring the
disclosure of both loan and equity investments; speeding up the
timescale for filing; classifying the investors to identify ‘insiders’ and
‘outsiders’ and ‘connected’ and ‘unconnected’ investors; and timely
publication of a list of 88(2) filings.
d. Undertake a one-off survey of business angels to identify the
proportion that are members of business angel networks, the
proportion of their investments that are made through these networks,
and the extent to which such investments are distinctive from those
made without using such networks. With this information it would be
possible to extrapolate from data on investment activity through
networks (as reported by BBAA, for example) to generate overall
‘headline’ market estimates.
e. Undertake a one-off survey to estimate the total share of business angel
investment activity that is accounted for by EIS (Enterprise Investment
Scheme) and use this information to scale up EIS investment statistics
to provide overall market estimates. This would require surveys of
both business angel investors and EIS investors.
f. While efforts to improve the utility of GEM, EIS and BBAA statistics
could generate much improved information on business angel activity
at relatively little cost, each of these data sources has limitations that
preclude using them in isolation. Accordingly, a multi-method
approach to generating consistent reliable time-series data on the
business angel market is recommended. In addition to improving the
utility of the 88(2) date, we recommend that consideration is given to:
i. Pressing the GEM research coordinators to change the
questions they ask about informal investment;
ii. Collecting more comprehensive data through BBAA on their
members’ investment activity;
iii. Scoping a project, based on an appropriate sample, to asses the
overlap between EIS and ‘pure’ business angel investment (this
could also provide information on business angel network
membership to permit scaling up of BBAA data).
6. Data collection on the business angel market can also be based on new
data collection, going beyond existing data sources, to develop a more
accurate, consistent and comprehensive estimate of angel investment
trends. The Report recommends that the Enterprise Directorate invests in
a company survey modelled on the Canadian Financing Data Initiative
(CFDI). This is methodologically rigorous in its approach and can
generate estimates of both the stock and the flow of business angel
investments on an annual basis, and could build on existing surveys (such
as the Annual Small Business Survey) to minimise the otherwise high set-
7. With a CFDI-type survey at the core of a data collection strategy,
reinforced by modifications to GEM, BBAA, EIS and 88(2) sources as
discussed above, there would be a strong basis for collecting consistent
and robust time series data on the UK business angel market. This would
give the UK the best statistical information on business angel activity and
would provide policy makers with and effective ‘instrument dial’ for
monitoring the early stage risk capital market and providing the basis for
evidence-led intervention in the market. Given the diversity of data
sources available and to be developed, and the importance of adopting a
multi-method approach to market estimation and tracking, the Enterprise
Directorate should commission and publish an Annual Report on the UK
business angel market.
Colin Mason is Professor of Entrepreneurship and Head of Department in the Hunter Centre
for Entrepreneurship (www.entrepreneur.strath.ac.uk) at the University of Strathclyde in
Glasgow. He was previously a Professor of Economic Geography in the Department of
Geography at the University of Southampton. His research is concerned with
entrepreneurship and venture capital, particularly in the context of regional development. He
has published extensively on topics such as the new firm formation process, the geography of
new firm formation and growth, the impact of small business policy, and venture capital in
both the academic and practitioner-oriented literature. Over the past twenty years his main
research, undertaken jointly with Professor Richard Harrison (Queen’s University of Belfast),
has been concerned with the availability of venture capital for entrepreneurial businesses -
they are recognised as leading academic authorities on the informal venture capital market.
He has been closely involved with government and private sector initiatives to promote
informal venture capital in the UK, including undertaking several consultancy projects for the
Department of Trade and Industry, Small Business Service and Scottish Enterprise, compiling
an annual guide to sources of business angel capital and investment activity report on behalf
of the British Venture Capital Association, and undertaking research on behalf of the National
Business Angel Network. He is an honorary member of the British Business Angel
Association (BBAA). Professor Mason was a member of the Governor of the Bank of
England’s small business finance forum and the Treasury’s Enterprise Panel which examined
the role that business incubators might play in stimulating technology-based businesses in the
UK. He has also advised the Australian Government and various Finnish and Argentinean
organisations on strategies to increase the supply of informal venture capital and has been a
consultant to the OECD and the European Union on issues associated with innovation and
He serves on the editorial boards of six entrepreneurship/small business journals and is
founder and co-editor of Venture Capital: An International Journal of Entrepreneurial
Finance (Routledge). He teaches courses on New Venture Creation and Entrepreneurship and
Regional Development and has also lectured on raising venture capital on several MBA
courses in the UK and abroad. In addition, he teaches on a Masters Degree in Industrial
Economics with Particular Emphasis on Small and Medium Sized Enterprises at the
Universidad Nacional General Sarmiento and Universidad Nacional de Mar del Plata,
Argentina and has also taught at universities in Canada and Australia. He has also been
involved in several workshops for entrepreneurs on how to raise finance and participated in
the Fit4Finance Programme that was run by Hertfordshire Business Link throughout the
South East and Eastern regions of England from 2002-6.
Richard Harrison took up the position of Professor of Management and Director of Research
at Queen’s University Management School at Queen’s University Belfast in January 2006
(http://www.qub.ac.uk/mgt/), and assumed the role of Director and Head of School in
September 2006. He was previously Dixons Professor of Entrepreneurship and Innovation,
and Director of the Centre for Entrepreneurship Research, at the University of Edinburgh
Management School, and has held professorships in entrepreneurship, strategy and executive
development at the Universities of Aberdeen and Ulster. Professor Harrison’s primary
research over the past twenty years has been in the area of venture capital and business angel
finance and encompasses three sets of studies. First, analyses of the operation of early stage
venture capital markets (both business angel markets and formal venture capital markets) and
their role in stimulating and supporting business development (and hence economic
development). Second, policy analysis and advice directed at the more effective mobilisation
of early stage risk capital, including assessment of public sector/state interventions in the
supply of capital at local, regional, national and international level. Third, international
studies of the emergence and development of risk capital markets in emerging economies –
much of this research is currently focused on East Asia (China, Malaysia, Singapore, Taiwan)
and concentrates on the analysis of (a) the internationalisation of the venture capital industry
and (b) the governance and regulatory issues in the development of an indigenous venture
capital industry in emerging economies.
He is founding co-editor with Colin Mason of Venture Capital: An International Journal of
Entrepreneurial Finance (Routledge) – now in volume 10, this is the only refereed academic
journal that specialises in the publication of research and policy papers on all aspects of
venture capital and entrepreneurial finance, including business angel finance.
Professor Harrison’s teaching at Masters level (full time and executive MBA programmes)
has focussed on a range of Entrepreneurship and New Venture Creation courses, with the
emphasis on developing both knowledge of the entrepreneurial process and the application of
the principles of entrepreneurship in practice in start-up and corporate contexts. Much of this
teaching is focused on opportunity identification and exploitation. Additional teaching lies in
the area of Business Strategy for Entrepreneurial Ventures and Leadership Theory and
Practice, and courses have been run for participants from major financial institutions and
small business owners in a wide range of sectors, including the education sector. He has also
contributed widely to MBA and doctoral education programmes in the US, Argentina and
Professor Harrison has served as adviser/consultant/speaker on venture capital, business
angels and financing innovation to, inter alia, UK Department of Trade and Industry (Small
and Medium Enterprise Policy Directorate; Innovation Unit; Small Business Service);
Scottish Financial Enterprise/Scottish Enterprise; Welsh Development Agency; British
Venture Capital Association; European Union DG XIII (EIMS Financing Innovation
workshops); European Seed Capital Fund Network (Liege workshop); Forbairt (Ireland);
Enterprise Ireland; Fraunhofer Institut, Karlsruhe (Germany); Six Countries Inter-
Governmental Programme; OECD; EURADA; European Business Angel Network; Swedish
Forum for SME Research; LINC(Local Investment Network Company) (UK); LINC
Scotland, CONNECT (Denmark), CONNECT (Sweden), and to advisors, policy makers and
local development interests on venture capital and informal venture capital (including advice
on the funding of technology based businesses and the role of technology rating services in
particular) in the UK, Ireland, USA and Europe. He has undertaken research on behalf of the
National Business Angel Network and is an honorary member of the British Business Angel
Association (BBAA). He has recently undertaken two major reviews of the early stage risk
capital market in Scotland for Scottish Enterprise (see <http://www.scottish-
enterprise.com/publications/equitymarketinscotland-2000-2004.pdf> for the most recent), and
prepared the background paper making the case for the Scottish Investment Fund (renamed
the Scottish Venture Fund), recently launched by Scottish Enterprise (see
<http://www.scottish-enterprise.com/sifstrat3.doc> for details of the Harrison/Peters report).
He was an invited participant in an Industry Canada experts roundtable on improving
statistical information on the informal venture capital market in Canada (2002), and was an
ad hoc member of the Finnish delegation to a US-Finland roundtable on developing the
venture capital market in Finland (2004) as part of his association with the Emerging
Business Research Centre at Tampere University of Technology and University of Tampere.
He is also a member of the International Advisory Board of the CIRCLE (Centre for
Innovation, Research and Competence in the Learning Economy) interdisciplinary research
project at Lund University, Sweden. He has recently been appointed to the International
Advisory Group for the Management of Rapid SME Growth 2006-2010 research project at
McGill University Montreal and Helsinki School of Economics.
A simple definition of a business angel is an individual, acting alone or in a formal or
informal syndicate, who invests their own money directly in an unquoted business in
which there is no family connection and who, after making the investment, takes an
active involvement in the business, for example, as an advisor or member of the board
of directors. There is an inference that such individuals are likely to have a high net
worth in order to have sufficient disposable wealth to make such high risk
Business angels make up what is often termed the informal venture capital market.
This contrasts with the formal, or institutional, venture capital market which
comprises professional investors – venture capital firms – who invest ‘other peoples’
money’, typically raised from banks, insurance companies and pension funds, but also
non-financial companies, wealthy families and charitable trusts. Their investment
activity is recorded and reported by their national venture capital association (e.g. the
British Venture Capital Association).2
Some researchers include investments by family (‘love money’) and friends (affinity
money) as part of informal venture capital. However, business angel investment is
conceptually distinct from investment by family and friends. Angel investment is
primarily commercially oriented3 – in terms of both the expectations of the investor
for capital gains and other financial returns and the terms and conditions governing
the investment - whereas love money is not. Thus, an angel investment can potentially
be made in any business whereas ‘love money’ is restricted to situations in which
there is a family or friendship connection between the investor and the business
owner. The Global Entrepreneurship Monitor (GEM) project has suggested that
family investment is more significant than disinterested or unconnected business
angel investment – in the UK; for example, around 12% of reported informal
investment is sourced from business angels, the remainder coming from family and
However, for the purposes of this report the terms business angels and informal
venture capital will be used synonymously to refer to this ‘pure’ angel investment.
There is a tendency to assume that national venture capital statistics are an accurate measure of
investment activity in the formal venture capital market and therefore to use them uncritically.
However, a study of the membership 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 (Karaömerlioglu and Jacobsson, 2000).
However, this does not preclude non-commercial motivations. Both Wetzel (1981) and Sullivan
(1994) have noted that some angels invest for less than fully commercial reasons, for example because
the product/service has social benefits, to support particular types of entrepreneur, or to support their
local community, and are willing to trade-off some financial return against these altruistic
considerations. Nevertheless, these investments remain distinct from those made by family and
1.1 Role of Business Angels
Business angels play a critical role in the creation of an entrepreneurial climate for
First, they invest largely in those areas in which institutional venture capital investors
are reluctant, or unable, to invest. Because business angels do not incur the transaction
costs of venture capital firms they are able to make smaller investments, well below
the minimum deal sizes considered by venture capital firms. Investments by business
angels are also relatively more concentrated at the seed and start-up stages, whereas
venture capital firms tend to provide finance for growth and development. This is best
illustrated by Freear and Wetzel (1990) in their study of the sources of finance used
by new technology-based firms in New England in the 1980s. They found that while
business angels invest across the full range of business development stages, they “are
the primary source of funds when the size of deal is under $1million” and “provide
more rounds of seed and start-up capital than venture capital funds.” For larger
amounts and later stages venture capital firms dominated. Replication of this study in
the 1990s confirmed these relationships (Freear et al, 1997; 1998).
It therefore follows that the informal venture capital market is the largest external
source of early stage risk capital, substantially dwarfing the institutional venture
capital market.4 Robert Gaston’s estimate for the 1980s was that business angels in
the USA were providing capital to over 40 times the number of firms receiving
institutional venture capital, and that the amount of capital they invested almost
exceeded all other sources of external equity capital for new and growing businesses
combined (Gaston, 1989a). A ‘back of the envelope’ estimate for the UK in the late
1990s suggested that the informal venture capital market provided almost twice as
much early stage finance as the formal venture capital market (Mason and Harrison,
2000a). Recent research in Scotland, tracking all identifiable investment deals over
the past five years, has demonstrated that business angel investment significantly
outweighs institutional venture capital investment (Harrison and Don, 2004; 2006).
Indeed, business angels are often the only source of external seed, start-up or growth
finance available once businesses have exhausted personal and family sources and
sources of ‘soft’ money (e.g. PYBT, government schemes such as Proof of Concept
and University Challenge) funds.
Second, business angels are much more geographically dispersed than venture capital
funds, which are overwhelmingly located in just a small number of major financial
technology centres and concentrate their investments in a relatively small number of
locations (Mason, 2007).5 In the case of the UK, BVCA statistics for 2006 reveal that
London and the South East attracted 42% of all venture capital investments and 60%
of the amount invested. Early stage investments are equally geographically
concentrated, with London, the South East and the East of England attracting 49% of
such investments and 54% of the amount invested by value. This is in marked contrast
to business angels which, Gaston (1989b) has suggested, “live everywhere”.
However, as noted earlier, recent evidence from the Global Entrepreneurship Monitor (GEM), which
is discussed in detail later, notes that capital supplied by family members substantially exceeded the
amounts raised by business angels.
See Mason and Harrison (2002c) for an analysis of the regional distribution of venture capital
investments in the UK.
However, since most business angels are current or former entrepreneurs they are
likely to be most common in regions with a thriving entrepreneurial climate. The only
analysis of the geography of business angel investing has been undertaken in Sweden
where Avdeitchikova and Landström (2005) show that both investments (52%) and
the amounts invested (77%) are disproportionately concentrated in metropolitan
regions (which has 51% of the total population). However, this is a less
geographically concentrated distribution than is the case for institutional venture
capital fund investments. Furthermore, business angels tend to invest locally, making
the majority of their investments in firms located within 50-100 miles of where they
live (Harrison et al, 2003). This is largely a reflection of the superior information
available on investment opportunities close to home and the ‘hands on’ nature of their
investments. So, from a regional development perspective the informal venture capital
investment process helps to retain and recirculate wealth within the region that it was
generated, counteracting the effect of most investment mechanisms which act as a
conduit through which personal savings flow out of regions to the nation’s financial
centres for investment in core regions and abroad.6
Third, informal venture capital is ‘smart money’. Business angels are typically ‘hands
on’ investors who seek to contribute their experience, knowledge and contacts to the
benefit of their investee businesses. The opportunity to become involved is a major
reason for becoming a business angel. The analogy is with being a grandparent –
being a business angel enables an entrepreneurial individual to become involved with
and contribute to the start-up and growth of a new business but without the 24-7
involvement of the entrepreneur (or parent). It is also a way in which investors can
reduce agency-related sources of risk (the availability of information to one party in a
relationship – in this case the business owner – that is not available to the other) and
increase the prospects that the business will be successful. Since most business angels
have an entrepreneurial background this involvement can also be expected to benefit
the businesses in which angels invest – although to date research has failed to identify
a positive relationship between involvement and business success despite the
reporting of such benefits (or the perception of benefits) by owners (and investors) in
1.2 Measurement Issues
Given the importance of a thriving informal venture capital market for the creation
and maintenance of an entrepreneurial economy it is important that Government is
able to measure the number of business angels and the level of their investment
activity. Measurement is important to monitor any decline in the number of business
angels, drop in their investment activity or change in the nature of their investments,
any or all of which could threaten the ability of businesses to access finance for start-
up and growth. Measurement is also required in order to assess the impact of
For example, see Martin and Minns (1995) for a regional perspective on the effect on pension fund
flows and Mason and Harrison (1989) who show that the flows of investment generated by the
Business Expansion Scheme favoured the ‘south’ over the ‘north’ – this example demonstrates the
impact of the institutionalisation of what was intended to be a development of the informal investment
market, as it is the pooling of funds (the imposition of an intermediary between the investor and the
investee business) that is associated with this regional concentration in investment flows: it is likely
that direct investments in BES-eligible businesses were less subject to this north/south leakage.
See the paper by Macht (2006), presented at the 2006 ISBE conference for a review of the literature
on the post-investment impact of business angels on their investee companies.
government interventions and other changes in the external environment on informal
venture capital investment activity. Equally, any evidence for an increase in the
number and investment activity of business angel investors has implications for the
development of additional market interventions to increase the supply of capital.
However, measuring the number of business angels and their investment activity on
either a cross-sectional (static) or time-series basis is extremely problematic. There
are two main problems: identification and definition.
First, as William E Wetzel Jr observed in his pioneering research on business angels,
the total population of business angels “is unknown and probably unknowable”
(Wetzel, 1983: 26) on account of their invisibility and desire for anonymity and the
undocumented nature of their investing. From a practical standpoint this means that,
unlike the institutional venture capital market, there are no lists or directories of
business angels. The consequence has been that research on business angels has had
to identify business angels through a variety of imperfect sources with no way in
which to test for the ‘representativeness’ of the samples that have been generated.
Indeed, many studies have been based on ‘samples of convenience’, such as angels
who are members of business angel networks, or arising from snowball sampling
methods8, both of which are likely to generate biased samples, not least because they
will under-estimate the number of angels who are ‘lone wolves’, acting alone on their
own initiative, or are one-time or infrequent opportunistic investors9. Furthermore, the
difficulty of finding business angels has meant that most samples are small, which
adds to the representativeness problem and makes it problematic to extrapolate from
sample results to derive population estimates of activity with any degree of
Second, there is definitional ambiguity. In order to gain a robust and accurate
understanding of the size and temporal dynamics of the business angel market, data
collection protocols will have to address the issue of how to differentiate between
what we refer to here as ‘pure’ business angel investment and the wider informal
investment market. There are four dimensions to this issue.
• First, the term ‘informal investment’ is increasingly used, notably by GEM, to
describe non-institutional risk capital investments in unquoted businesses. As
noted above, this includes investments made by family, friends and business
angels, with business angel investment being the smallest category. However,
business angels have to be seen as conceptually distinct from ‘love money’
invested by family and friends. Angel investment is primarily commercially
oriented (subject to the caveat that there is a sub-category of socially
motivated investment) whereas love money is not. Moreover, an angel
investment can potentially be made in any business whereas love money is
In this approach, a small number of angels are identified and they are asked to identify other angels
that they know in order to expand the sample.
Previous research (e.g. Mason and Harrison, 1992) has suggested that these investor types will be
common in a random sample of angel investors.
restricted to situations in which there is a family or friendship connection
between the investor and the business owner. Adding to the definitional
confusion is the fact that whereas a clear distinction can be made between
family members and others, the definition of a friend is much more
problematic: surveys of ‘pure’ business angels have consistently identified
social, as well as business, networks as sources used to identify potential
investment opportunities. A further confusion is that the same individual can
be a source of both angel finance and love money.
• The population of business angels is not fixed or static. Rather, being a
business angel is a transitory state. A ‘virgin’ angel is someone who is looking
to make their first investment – but as the experience of business angel
networks in the 1990s attests, many of these individuals never make any
investments. Another problematic category are individuals who have made
one or more investments but are not currently looking to make new
investments, either because they have no further liquidity (but may become
active investors again once they realise proceedings from a successful exit
event) or because they have invested and have withdrawn from the market on
the basis that this activity is ‘not for them’10. Counting either category of
individual as a business angels risks exaggerating the total number of active
angels in the market and hence the investment capital potentially available. A
final category is latent investors – individuals who would not describe
themselves as active investors but who will invest opportunistically if suitable
deals ‘pop up’. The implication is that approaches which use the business
angel population as a source of information on investment trends (i.e. supply
side measurement) must address the issue of how to identify these various
components of the angel population in order to generate reliable estimates of
the availability of finance from business angels. In practice it may be
conceptually clearer to focus on actual business angel investment flows rather
than the amount of capital that business angels say they have available for
• The angel market is evolving, notably with the creation of angel syndicates
and other angel groups. These groups operate in two ways. First, they may act
as formal or informal syndicates in which each member of the syndicate takes
an active role in the investment opportunity identification, screening and
investment processes. Typically such syndicates will be relatively small.
Second, they may operate on the basis of a small group of active investors
offering passive members of group the opportunity to invest in deals that they
are offered but had no role in identifying, evaluating or negotiating and will
not play any hands on role in the investee businesses. This second group might
be considered to have broken some aspects in the conventional definition of a
business angel. Nevertheless, as the members are investing their own money
on a deal-by-deal basis and making a basic investment decision (yes or no)
they can still be considered to be business angels. Rather more problematic are
those angels groups that operate on the basis of pooling their investment funds
One example of a successful entrepreneur who exited from his business, initially set out to be a
business angel investor and ceased to consider further activity after two unsuccessful investments
convinced him this was not something he could undertake successfully is given in Mason and Harrison
and devolving the investment decisions to the syndicate leaders. This model is
much more common in the USA than in the UK, where such investments are
not eligible for tax relief under the Enterprise Investment Scheme. The reality
of angel investing is therefore that it operates on a spectrum, occupied at one
end by the solo investor who makes his or her own investment decision to
invest directly, and at the other end by investors who are part of angel
syndicates who simply say ‘yes’ or ‘no’ to the investment opportunities that
they are offered and play no direct hands-on role in the investee company. The
hands-off investor who invests in a pooled fund, and delegates the decision on
which investments to make, would not be considered to be a business angel on
the basis on the definition adopted here.
• There is a final definitional issue which has become important in economies
such as the UK. Since the introduction in 1981 of the Business Start-up
Scheme, and the later replacement of this with the Business Expansion
Scheme and the Enterprise Investment Scheme (EIS) (discussed below), and
the introduction of Venture Capital Trusts (VCTs), there have been tax-
efficient vehicles designed to encourage and leverage private capital into
unquoted businesses with a view to closing the equity gap. However, while
schemes such as EIS allow for direct investments by individual investors and
business angel syndicates (to make their investments tax efficient), there is a
problem with pooled investments under EIS and through VCTs, where
individuals commit investment, to take advantage of the tax breaks available,
to fund managers, who make the investment decisions and undertake the post-
investment monitoring. This divorces the investor from the investment
decision-making process, and would not qualify as business angel investment
as we define it here. It is a moot point as to whether the introduction of pooled
EIS funds and VCTs has diverted investment funds that would otherwise have
come to the market as business angel investment.11 While much EIS
investment in particular will meet our definition of business angel investment,
some will not, and most VCT investment will not meet this definition. Given
that EIS investments are captured and reported by Inland Revenue one key
question is the extent to which it is a useful approximation for overall business
angel investment activity?12
The project specification defines the objective as being to lay the foundations upon
which a robust time series dataset can be developed to measure business angel
activity in the UK. The ability to measure and monitor changes is seen as being
beneficial both to government in developing policy to increase access to finance by
small businesses, and to stakeholders and finance providers. The specification sets out
four key elements in the study:
The extension of VCTs to allow investment into AIM-quoted companies takes this investment
channel beyond the business angel market and make it impossible in any case to rely on VCT data as a
trend indicator in the business angel market.
It also raises the issue of the extent to which the development of a time series should be based on
capturing data on the investment activity of a specific group of actors in the market (‘business angels’)
or on scoping out the commitment of investment to a specific set of circumstances (defined variously
as start-up/new ventures, equity gap issues, technology ventures etc).
• Establishing criteria that will define which informal investment activity will be
classified as business angel activity;
• Reviewing data sources currently available on the business angel market;
• Developing a methodology to collect robust time series data on the size and
scope of the UK business angel market;
• Address data collection issues.
In Section 2, as background, we provide a comprehensive overview of studies that
have examined the UK business angel market, noting in particular the approaches
used in these studies to identify and define business angels. Section 3 offers a
definition of business angels and their investments. Section 4 reviews the research
literature to provide a critical assessment of data sources that have been used in the
UK and elsewhere to identify business angels and measure their investment activity.
Based on this review, Section 5 makes recommendations on the most appropriate
approach to develop a robust time series data on:
• The number of active business angels in the UK;
• The characteristics of business angels;
• The number, size, sector and characteristics of their investments.
2. THE UK BUSINESS ANGEL MARKET: AN OVERVIEW OF PREVIOUS
The UK business angel market has been the subject of research for nearly 20 years.
This section provides a review of our current knowledge of business angels and the
operation of the informal venture capital market. The review is in three sections. It
begins with a summary of the first ever study of business angels in the UK by Mason
and Harrison (1994) that was conducted between 1989 and 1991. Second, it identifies
subsequent in-depth studies that sought to extend the Mason and Harrison study.
Third, it examines studies that have sought to examine specific aspects of the
investment process. We pay particular attention in this review to the approaches used
in these studies to identify and define business angels.
2.2 Mason & Harrison (1994): ESRC Small Business Research Initiative Study
The first ever study of business angels in the UK was undertaken by Mason and
Harrison between 1989 and 1991 as part of the ESRC’s Small Business Research
Initiative. At that time awareness of business angels in the UK was extremely low.
However, a report by the Advisory Committee on Science and Technology, a Cabinet
Office committee on barriers to the growth of entrepreneurial businesses which was
published mid-way through the research, did emphasise the importance of business
angels, arguing that “an active informal venture capital market is a pre-requisite for a
vigorous enterprise economy” (ACOST, 1990: 41). Mason and Harrison’s study was
hugely influenced by US studies, notably Wetzel’s pioneering study of business
angels in New England (Wetzel, 1981; 1983; 1986a; 1986b) and the subsequent
studies funded by the US Small Business Administration’s Office for Advocacy,
notably Arum Research Associates (1987), Gaston and Bell (1986; 1988)13 and Haar
et al (1988).14 Its aim, following Wetzel (1986a: 132), was simply to put “some
boundaries on our ignorance”, its approach to identifying business angels was based
on the approach used by Wetzel and the questionnaire was modelled on the one used
in the US SBA studies, in part to facilitate UK-US comparisons.
The study had five objectives: (i) to identify the characteristics of UK business angels
and compare them with their US counterparts; (ii) to document their investment
activity; (iii) to identify the characteristics of their investment portfolios; (iv) to
examine their involvement with the companies in which they invest; and (v) to
identify their motivations and factors which they take into account when evaluating
investment opportunities. Following the approach of US studies, questionnaires were
sent to individuals on selected mailing lists which appeared to target individuals with
the characteristics of business angels (business owners, high net worth individuals).
This generated 47 completed questionnaires from over 4000 questionnaires. A further
12 questionnaires were completed by subscribers to Venture Capital Report, a
This research is accessible as Gaston (1989b)
Visits in the late 1980s and early 1990s by Harrison to the SBA and by Mason and Harrison to
Wetzel and his colleagues at the University of New Hampshire gave them access to the reports and
survey instruments and an understanding of the methodological issues involved in finding business
subscription-only magazine containing information on businesses seeking finance,
one response came from questionnaires sent to individuals who placed adverts in the
Financial Times seeking investment opportunities in unquoted companies, and 13
came from investors who were either known to the researchers or referred to them by
a third party. This gave a total of 86 responses.
The key findings were as follows:
(i) Personal characteristics
• UK business angels are predominately male (99%), predominantly in the
45-65 year age group.
• They are experienced entrepreneurs, two-thirds having started at least one
business, and 70% of these being serial entrepreneurs. Half of the
entrepreneurs were cashed-out.
• The occupational classification is dominated by business-owners, self-
employed and consultants (a description often used by entrepreneurs who had
sold their business).
• Relatively high incomes and net worth but not as rich as might have been
expected (only 16% were millionaires).
(ii) Investment activity
• High rejection rate – invest in only 8% of all opportunities that they consider.
• Median amount invested is relatively small (£22,000 at 1990 prices).
• Only a small proportion of their wealth is committed to such investments
(typically under 10%).
• There is considerable diversity amongst investors in the number of deals
considered and investments made.
• Most angels are infrequent investors and nearly one-third reported making no
investments in the three years prior to the survey (Nb. all respondents self-
defined themselves as ‘business angels’).
• Information on investment opportunities largely comes from business
associates and friends and the investor’s own search – these were also the
‘best’ sources in the sense of being most likely to receive investment. Formal
sources (e.g. accountants, lawyers, bankers) provide relatively few referrals
and have low conversion rates.
• Most angels (70%) cannot find sufficient investment opportunities and have
funds available to make more investments.
(iii) Investment characteristics
• Investments are concentrated in start-up and early stage businesses.
• Investments occur in all industry sectors but there is a strong bias to
technology businesses (self-defined) (33% of the total).
• The average size of individual investments is £10,000 – only 12% of
investments exceed £50,000 (of course, deal sizes were often larger because
some angels invested with others).
• Provide a mix of equity and loan finance.
• Around one-third of investments involve other angels – however, the majority
of investors invest on their own.
• Most investments involve a minority equity stake in the investee business.
• The majority of business angels are ‘hands on’, although only a minority join
the board. However, nearly one-third are passive, merely receiving
shareholder information and attending shareholder meetings.
• Investments tend to be local, with two-thirds in businesses located within 100
miles of the investor’s home or office.
(iii) Investment motivations
• Business angels are motivated primarily by financial considerations, notably
the opportunity for high capital appreciation. However, non-financial
considerations also play an important role, notably to participate in the
(iv) Investment appraisal
• The key factors which angels take into account are the management team and
the growth potential of the market.
• The vast majority of angels rely on their own evaluation, either exclusively or
supplemented by outside advice.
Comparison with US business angels (Harrison and Mason, 1992a) reveals few
differences in demographics, although those in the UK tend to be older. However,
there are significant contrasts in the operation of the market. In comparison to US
investors, those in the UK
• have more investment opportunities brought to their attention, seriously
consider more opportunities but invest in a smaller proportion.
• are more likely to invest independently.
• are less likely to be approached by entrepreneurs seeking finance.
All of this suggests that the informal venture capital market in the UK may be
operating less efficiently than its counterpart in the USA, particularly with respect to
information flows on information opportunities. Landström (1993) added evidence on
business angels in Sweden to enable a three-way comparison which suggested that
Swedish investors operated in ways that are closer to the US than the UK – for
example, the ratio of opportunities considered to investments made, investment
activity, time spent in evaluation and syndication. However, it is unclear the extent to
which differences between these studies in the identification of business angels
contributes to this variation.
In parallel, Mason and Harrison also undertook a survey of investors registered with
LINC, a federation of local business angel networks (or business introduction services
as they were originally known). Usable responses were obtained from 53 current and
previous members. LINC investors were distinctive from the respondents to the ESRC
survey in three respects: they were younger; they had higher incomes and lower net
worth, and made larger investments (Mason and Harrison, 1996a). This raised the
possibility that business angels who join business angel networks may be distinctive.
The Mason and Harrison study has stimulated further research. Subsequent studies
have been of two types. The first type are further large, comprehensive studies of the
UK informal venture capital market which have sought to extend, qualify or challenge
the profile of the UK informal venture capital market presented by Mason and
Harrison (1994). However, the profile of business angels presented by Mason and
Harrison (1994) has proved to be remarkably robust. The second type is a set of
studies that have sought to add detail to the broad-brush profile of business angels
presented by Mason and Harrison (1994) and subsequent researchers. This has mostly
involved a shift away from what has come to be termed the ‘ABC’ studies of investor
characteristics and investment activity in favour of in-depth studies of particular
investor types and specific aspects of the investment process.
One implication from this research is the difficulty of identifying business angel
investors, and the significant resource costs incurred in trying to build up a sufficient
sample for analysis and extrapolation. Accordingly, as in this and other subsequent
studies, market estimates, even in cross-sectional terms, are hard to come by, and the
logistics of the research preclude easy elaboration of the survey approach into the
basis for time series analysis.
2.3 Beyond the initial Mason and Harrison study
The first major study of the UK informal venture capital market following Mason and
Harrison’s (1994) pioneering exploratory study was research undertaken by Patrick
Coveney at the University of Oxford for a PhD which was repackaged as a ‘how to’
book for businesses seeking to raise finance (Coveney and Moore, 1998). However,
the key findings had been published some time earlier as Stevenson and Coveney
(1994; 1996). The key contribution was to document the heterogeneity of business
angels by developing a six-fold categorisation:
• Virgin angels – individuals with funds available looking to make their first
investment but have yet to find a suitable proposal.
• Latent angels – rich individuals who have made angel investments but not in
the past three years, principally because of the lack of suitable investment
• Wealth maximizing angels – rich individuals who invest in several businesses
for financial gain.
• Entrepreneurial angels – very rich, very entrepreneurial individuals who back
a number of businesses for both the fun of it and as a better option than the
• Income seeking angels – less affluent individuals who invest some funds in a
business to generate an income or even a job for themselves.
• Corporate angels – companies which make regular and large angel-type
investments, often for majority stakes.
For each group the study sought to identify the funds available for investment,
demographic and financial characteristics, investment criteria and, where relevant,
barriers to investment.
The study was based on a sample of nearly 500 investors and 467 investments
(involving over 200 investors) – a much larger sample than used by Mason and
Harrison15 and achieved by working in collaboration with Venture Capital Report, a
monthly investment opportunity magazine with a subscriber base of over 700 who
paid a subscription, at that time, of £350 per annum. Over 90% of respondents were
either VCR subscribers or had made enquiries about subscribing. It might be expected
that the requirement to pay a significant subscription would have biased the
subscribers to the largest and most active investors.
The most significant difference from the Mason and Harrison study was that Coveney
found a much higher level of investment activity, which is not surprising in view of
the sample frame used. Investors invested more frequently, made much bigger
investments (median investment of £40,000 per investment) and had bigger
investment portfolios. The proportion of passive investors was also lower. However,
these differences are likely to have arisen on account of the approach taken to identify
business angels which is likely to have favoured more active and bigger investors, and
the inclusion of corporate investors (9% of all respondents) which will also have
biased investment amounts upwards (see Mason and Harrison, 1997 for a full
critique). Other findings, such as the inability of angels to find sufficient investment
opportunities, friends, family and business associates being the main referral sources,
and the dominance of investments in start-up and early stage businesses are all
consistent with those reported by Mason and Harrison (1994).
The second major study in the wake of Mason and Harrison was by Mark von
Osnabrugge, another Oxford University PhD student. This was a more theoretically-
based study. The emphasis was to compare the investment approaches of business
angels and venture capital funds: the focus was therefore on the investment process
rather than the size and scope of the informal venture capital market. Major issues
examined included the following: deal flow, screening, investment criteria, due
diligence, contracting, and post-investment monitoring and control. The research was
based on 262 questionnaire responses from business angels and venture capital fund
managers and 40 personal interviews. Findings were published in academic papers
(e.g. Van Osnabrugge, 1998; 2000) and integrated into a book which reviewed the
entire investment process (Van Osnabrugge and Robinson, 2000).
Mason and Harrison have undertaken two further significant studies. The first of these
was based on funding from the DTI to undertake a follow-up of their ESRC study
which investigated other aspects of the informal venture capital market that remained
shrouded in mystery. So here again the study was not particularly interested in issues
associated with the size and scope of the market. The methodology involved
questionnaires being distributed by 19 business angel networks to their investors: 127
usable responses were obtained, mostly from this source.16 This research led to the
publication of three papers. Mason and Harrison (1999) provided a critical review of
the impact government intervention to stimulate the informal venture capital market,
looking specifically at the use of tax incentives (EIS, roll-over relief and VCTs) and
business angel networks. They concluded that policy was too supply oriented and
needed to address deficiencies on the demand side. In conjunction with evidence from
However, the size of the questionnaire, and hence the detail in the data collected, was much smaller.
Some questionnaires were also sent to business angels who had been identified through informal
contacts and recommendations.
a later study (Mason and Harrison, 2002a) this led them to argue that policy needed to
address the issue of ‘investment readiness’ (Mason and Harrison, 2001; 2004a). The
second paper from this research (Mason and Harrison, 2002b) provided the first ever
evidence on the returns achieved by business angels, their time to exit and method of
exit.17 A related paper found that investing in technology businesses generated an
almost identical returns profile to that of investments in non-technology businesses
(Mason and Harrison, 2004b).
Their second study was based on a survey of investors registered with BANs that
were part of NBAN (Mason and Harrison, 2002a). This supported the clear picture of
business angels being self-made high net worth individuals (62% were millionaires;
71% were or had been business owners), motivated largely by financial considerations
but also from the satisfaction of being involved in the entrepreneurial process,
typically allocating between 5 and 10% of their total investment portfolio to angel
investments. It confirmed their earlier study that the tax regime was the main macro-
level influence on their willingness to make angel investments. In this study 38% of
investors had used the EIS. Over 90% of respondents were looking to make further
investments – no doubt this was a reason why they were members of BANs. The
study therefore probed the barriers which prevent business angels from making as
many investments as they would like – investment preferences (linked to
industry/market knowledge, and location) and the quality of investment opportunities
were both influential. However, investors did indicate that they relaxed their
investment criteria in certain circumstances – notably if the management team had
high credibility, if the investment amount was small, if the business was close to
home and if the opportunity had been referred by a trusted source. The failure to
successfully negotiate investments, typically because of differences of opinion on
price and size of shareholding, was also identified as a relatively frequent occurrence.
A fifth significant contribution is a study of business angels in Scotland by Paul et al
(2003). Scotland has a long tradition of business angel activity. Following research by
KPMG (1992) the stimulation of the business angel market was identified as a key
focus for policy intervention in the Scottish Business Birth Rate strategy. This
resulted in the establishment of LINC Scotland in 1992 which, under its Chief
Executive, David Grahame, is one of the most respected and innovative business
angel networks in the world. Scotland is also distinctive in terms its number of
business angel syndicates. The KPMG study was based on interviews with 38
business angels who had made 89 investments in the previous four years involving an
investment of some £4.4m, with an average of £50,000 (skewed by five investments
each of over £250,000). These investments were predominantly in seed, start-up and
early stage businesses. Investments were made primarily for capital gain rather than
income, the investment instruments was overwhelmingly straightforward equity and
transaction costs were kept low by not costing time and in most cases keeping
documentation to a minimum. Some 80% of investments were less than £50,000.
Investors expected to be personally involved in their investee companies. The
investors were predominantly aged 40-55 and were either cashed out or disengaged
entrepreneurs or experienced managers who had retired or taken redundancy. The vast
An earlier, unpublished version of this research seems likely to have influenced government policy,
the evidence on holding period prompting government to reduce its capital gains taper from 10 years to
four years and evidence on the size of shareholding prompting the abolition of a minimum qualifying
equity share (Mason and Harrison, 2002b).
majority of investments were within 50 miles of their home or work. Investments
were typically sourced through personal networks. Consistent with other research,
investors could not find sufficient investment opportunities. Based on its survey
evidence the study estimated that the size of the informal venture capital market in
Scotland, in terms of both money available for investment and amounts already
invested, was around £25m.
The Paul et al (2003) study was based on a questionnaire survey of current and
previous LINC Scotland investors and members of one angel syndicate. This
generated 140 usable responses, including both virgin angels and those who had made
one or more investments. For the most part the profile of angels and their investment
activity reinforced the picture presented in earlier studies. Scottish angels are
predominantly male and aged over 50. However, in contrast to other studies, only a
minority had a SME background. They were motivated by capital gain, with interest
and fun as subsidiary reasons. The entrepreneur/management team was their key
investment criterion. The sample included 30% who were looking to make their first
investment and, at the other extreme, 14% who had made more than five investments.
This skewed distribution also emerges in terms of the amount invested, with 45%
investing less than £50,000 and 6% investing over £500,000. Half invested as part of
a syndicate. Echoing a constant theme in the literature, most investors were
constrained from investing more by the lack of investment opportunities. There was
no attempt to estimate the size of the market.
Finally, it is important to highlight two somewhat obscure studies from the ‘grey’
literature which sought to profile the angel market in the UK. The first was a
summary of a study of 50 business angels (and 47 intermediaries) undertaken on
behalf of the National Westminster Bank Technology Unit (Innovation Partnership,
1993). This study pointed to the diversity of angel types and involvement in the
market (in terms of amount invested, frequency of investment, size of investment and
amount available for investment). Age (average age of 50), motivation (capital gain)
and background (52% former entrepreneurs) confirmed other studies. It also
confirmed that angels tended to find deals through their personal contacts. In terms of
investment criteria the report confirmed that investing close to home was an important
consideration for a majority of investors – however, this was influenced by the size of
the investment, about of involvement required and ease of travel (“how far can I
travel in an hour”). With this caveat, most investors would consider any investment
opportunity on its merits: only a minority had clear investment criteria – and found it
easier to express these in terms of what they would not invest it. Most investors
wanted to play a hands-on role in their investee businesses. The typical investment
was £20,000-£50,000 but the range extended from £5,000 to £500,000. Finally, the
study noted the difficulty of getting angels to say how much money they had available
for future investments. The potential amounts available for investment are subject to
fluctuation, depending on an individual’s liquidity, the opportunity itself and the state
of their other investments.
The Investor Pulse (2003) survey, which was undertaken by C2 Ventures, was based
on a web based questionnaire that the angel investment community was invited to
complete. A key deficiency is that the report does not indicate the actual number of
responses. However, the survey broadly confirmed the picture of business angels in
the UK that had been emerging over the ten years since publication of Mason and
Harrison’s initial study.
• Predominantly a business ownership and management background.
• Range of investment experience from ‘yet to invest’ to more than five years of
angel investment experience.
• Motivations dominated by financial considerations but ‘fun’ is an important
• The majority (60%) prefer to invest on their own.
• Emphasis on investing in start-up and pre-revenue businesses.
• Key factors considered at the initial screen: clear financials; scaleable business
model with a clear marketing and sales plan; ‘must have’ (rather than ‘nice to
have’) product/service; clear exit and realistic valuation; understanding that it
is the team that gets the funding, not the plan.
• Two-thirds of transactions in the period 2000-2002 were for less than £50,000
(average of £27,500), but a small proportion of investments were in excess of
2.4 Adding Detail to the Operation of the Market
In addition to these large scale studies have been a number of more narrowly focussed
enquiries. These have been of two types. First, there have been some studies which
have examined specific types of business angels. Second, there have been several
studies on specific stages in the investment process.
2.4.1 Studies of specific types of business angel
There are four studies in this category.
Anderson (1998) studied high income workers in the City of London on behalf of
LINC for his MBA dissertation at London Business School. It found that only 40%
had invested in unquoted companies, with lack of information, lack of time and lack
of trusted advice being barriers to investment.
Kelly and Hay have published two studies which have examined active business
angels. Their first study reported on what they termed ‘serial investors’ – their sample
comprised eight investors who they interviewed in detail and who had made an
average of five investments. The sample split into two groups: those who always
invested on their own and those who invested as part of a syndicate. The key
conclusion of the study was that such investors typically make investments in
industries, markets and technologies where they have some familiarity and know the
entrepreneur, or have the deal referred by an individual who has this knowledge.
However, angels in syndicates had a greater scope for investing in unfamiliar
situations or where they did not know the entrepreneur because they were able to
leverage of the knowledge of their co-investors (Kelly and Hay, 1996).
Their second study involved an investigation of the most active business angels, what
they termed ‘deal-makers’, and others have called ‘super angels’, to examine their
sources of information on investment opportunities. They concluded that these angels
(defined as having completed six or more investments) rely less on publicly available
sources of information and more on their own private sources from an extensive base
of contacts developed as a result of building up their own portfolios (Kelly and Hay,
Harrison and Mason (2007) have provided the first-ever profile of women business
angels in the UK. There are some differences in characteristics and background but
the numbers are too small to test for statistical significance. Women appear to be
slightly more likely to invest in women-owned businesses, but this is not because they
factor gender into their investment decision. Indeed, the findings tentatively suggest
that gender is not a major issue in determining the supply of business angel finance,
and that the informal venture capital market is not differentiated along gender lines.
However, further investigation of this topic would be worthwhile in view of the
tentative nature of these conclusions.
2.4.2 Studies of specific stages in the investment process
(i) The personal portfolio allocation decision
Mason and Harrison (2000b) have explored in a very preliminary fashion the factors
which influence how much of their wealth business angels will allocate to investments
in unquoted businesses. One of the key distinguishing features of informal venture
capital is that it is discretionary: business angels are investing their own money and
so, unlike venture capital funds which have raised money for the purpose of investing,
business angels do not have to invest. Based on responses from 56 investors attending
a LINC Scotland conference18, Mason and Harrison show first of all that money
which is not invested in unquoted businesses would instead be invested primarily in
the stock market, property and interest-bearing cash accounts. Respondents were
presented with a list of potential influences that were thought to potentially influence
their willingness to invest (e.g. tax environment, economic conditions, stock market
conditions). The evidence indicated that business angels were particularly sensitive to
tax – the availability of tax relief on their investments was the most important factor
encouraging them to invest, with lower capital gains tax being the second most
positive factor, while higher rates of capital gains tax was the top factor which would
discourage investment. Lower tax on dividend payments was the third most
significant factor encouraging investment while higher tax on dividends was the
second most important factor to discourage investment. By contrast, economic
conditions are much less influential on the willingness to invest, although by no
means insignificant. Stock market conditions have the least influence on investment
activity. These conclusions are supported by evidence from two other studies, one of
which is the Mason and Harrison DTI study (discussed earlier) (Mason and Harrison,
1999; Mason and Harrison, 2002a).
(ii) Investment decision-making criteria
Although profiling the respondents was not an objective of the study it is worth noting that they
conformed to the highly skewed distribution that had been identified in previous studies. At one
extreme, 26% of investors had not made any investments in the previous two years and 28% had made
one or two investments whereas at the other extreme 24% had made more than five investments. The
amounts invested ranged from less than £50,000 (19% of respondents who had made investments) to
£250,000 and over (32%).
The landmark studies by Mason and Harrison (1994), Coveney and Moore (1997) and
van Osnabrugge and Robinson (2000) all examined the criteria used by business
angels in making investment decisions. However, this evidence was generalised and
retrospective. Specifically, it ignored the different stages in the investment process
and the scope for different criteria to assume greater or lesser importance as the
investment process proceeded. Subsequent studies have probed the investment
decision-making process in much more detail.
Mason and Harrison (1996b) undertook a case study of deals rejected by a private
investment syndicate. This revealed that the decision-making process involves two
stages: an initial review and a more detailed appraisal for those opportunities that
passed the initial screening stage. Three factors dominated as reasons for rejection:
characteristics of the management team, marketing and market-related considerations,
and financial considerations. Most opportunities were rejected for just one or two
reasons – although deals rejected at the initial review stage were more likely to be
rejected on the basis of the culmination of several deficiencies rather than a single
Mason and Rogers (1997) undertook a study in real time of the factors that business
angels take into account in their initial screening of investment opportunities – the
stage at which most investment proposals are rejected.19 This particular study was
based on the reactions of 10 business angels to a particular investment proposal that
appeared in Venture Capital Report. The larger unpublished study reported on the
reactions of 19 business angels to three investment proposals, providing a total of 30
decisions (Mason and Rogers, 1996). Investors’ responses were taped, transcribed,
coded and subjected to content analysis. The findings indicated that investors placed
the most attention on market and financial considerations and the
entrepreneur/management team. The study also highlighted several distinctive
features in the approach of investors to the initial screen:
• Investor fit: the first response of investors was to ask themselves whether this
opportunity was a good fit with their personal investment criteria – in
particular, did they know anything about the industry or market, how much
money were they looking for, where is it located and was their scope to make
• Investor preconceptions: the previous experiences and preconceptions of
investors influence their attitude to the opportunity – this was particularly
influential when considering their view of the market.
• Focus: investors placed a strong emphasis on the need for businesses to have a
clear market and business focus.
• Investor attitude: the approach of investors at the initial screening of an
investment opportunity was to look for reasons to reject it. They were
suspicious and cynical and looking to be convinced.
The research in this study was used to make the video “You Are The Product” (1997) which has been
successfully used as a means of interactively teaching entrepreneurs how to become ‘investment ready’
by giving them an insight into what business angels look for when they read a business plan or
Subsequent analysis of this data by Harrison et al (1997) interpreted the business
angel’s reaction to investment proposals in a ‘swift trust’ framework, identifying
some of the key inter-personal dynamics involved in the investment process.
Mason and Harrison (2003a) adopted a similar real time methodology to capture the
reactions of business angels to a presentation by an entrepreneur seeking finance. This
highlighted the importance of presentation in shaping investor attitudes and how a
poor presentation will quickly turn potential investors off.
Finally, Mason and Stark (2004) adopted the approach used by Mason and Rogers but
with the difference that the same investment proposals were shown to business angels,
venture capitalists and bankers in order to reveal differences in their approaches to
investment evaluation. Bankers were shown to have a very different approach to that
of business angels and venture capitalists, placing much greater emphasis on the
financial aspects of the proposal to the exclusion of most other issues. Venture
capitalists place equal emphasis on market and financial issues while business angels
give greatest emphasis to the entrepreneur and investor fit.
(iii) Negotiation and Contracting
The first evidence on how investments were negotiated and structured was provided
by Mason and Harrison (1996c) in a study based on a telephone survey of 31
investors and 28 entrepreneurs involved in investments that had been made through
LINC. The majority (71%) of investors had made only one or two investments. Key
findings were as follows:
• Only a minority of investors (38%) and entrepreneurs (44%) identified any
issues that were difficult to negotiate – the most difficult issues were the size
of the investor’s shareholding and related issues of ratchet clauses and pricing.
• The approach of investors to valuation was very imprecise, with the actual
valuation reached by processes that were variously described as ‘arbitrary’,
‘informal’ or ‘negotiated’.
• Over three-quarters of entrepreneurs sought professional advice, mainly from
lawyers, in the negotiation process. The costs were fairly modest. In contrast
only just over one-third of investors used professional advisers, again mainly
lawyers to draw up or review the investment agreement.
• The decision time was relatively short, in most cases extending over less than
• In only 70% of investments was a formal investment agreement drawn up.
• Two-thirds of investors and entrepreneurs agreed that the investment
agreement was equally favourable to both sides; 20% of investors and 15% of
entrepreneurs felt that it favoured the entrepreneur while 12% of investors and
18% of entrepreneurs felt that it favoured the investor – in other words, most
entrepreneurs did not feel that the process of raising finance from business
angels was exploitative.
• Only 40% of investments involved straight equity, with a further 29%
involving only loans. However, equity dominated in those deals that involved
both equity and loan finance.
• The investor or investors took a minority position in 56% of the investments
and a 50% stake in 19% of investments.
• Most of the equity investments were in ordinary shares – only 16% involved
complex instruments (e.g. preference shares).
LINC sponsored a follow-up survey of investments made in the period 1994-96 using
the same survey instrument (Lengyel and Gulliford, 1997).
A much more detailed investigation of business angel contracts was undertaken by
Peter Kelly for his PhD at London Business School which attracted responses from
106 business angels who had largely been contracted through business angel networks
(Kelly and Hay, 2003). Compared with previous studies these investors would appear
to be unusually active, with an average of eight investments each. The study found
that, contrary to previous studies business angels draw up contracts as a matter of
course. They want to spell out quite clearly the rights, roles and responsibilities of
management and investors. Five non-negotiable items are identified:
• Veto rights over acquisitions/divestures;
• Prior approval for strategic plans and budgets;
• Restrictions of management’s ability to issue share options;
• Non-compete contracts required from entrepreneurs upon termination of
employment in the venture;
• Restrictions on the ability to raise additional debt or equity finance.
These non-negotiable give investors a say in material decisions that could impact the
nature of the business and the level of their equity holding. There are also a number of
contractual provisions to which investors attach relatively low importance and so may
be considered to be negotiable:
• Forced exit provisions;
• Investor approval required for senior personnel hiring/firing decisions;
• The need for investors to countersign bank cheques;
• Management ratchet provisions;
• The specification of a dispute resolution mechanism in writing up front.
These items were included in fewer than 40% of the contracts studied. Less
experienced angels include a wider array of protective contractual safeguards. But
with experience angels become more focused on elements that can impact their
financial returns. Finally, Kelly and Hay (2003) observe that ‘important to include’ is
not the same as ‘willingness to invoke’, and suggest that angels prefer to use their
relationship with the entrepreneur to manage setbacks and problems rather than using
the contract to invoke their rights.
(iv) The post-investment relationship
The landmark studies discussed earlier provided some evidence on the ‘smart’ aspect
of business angel investing. However, this aspect of angel investing has not been
explored in much detail by UK scholars. Based on a survey of investors who had
raised finance from either venture capital funds or business angels, Harrison and
Mason (1992b) presented evidence on the roles identified by the entrepreneurs as
played by business angels and their assessment of how helpful these contributions
were. This highlighted ‘serving as a sounding board to the management team’,
‘monitoring financial performance’ and ‘assistance with short term crisis/problems’ as
the most valued contributions. Mason and Harrison’s study of deals that had been
facilitated through LINC (1996c) looked in more detail at the post-investment
experience. It confirmed that the norm was for investors to become involved, and
would typically join the board. Their time input varied from at least a day a week to
less than a day a month.20 Their contributions were also varied and best summarised
as passing on their business experience. However, only half of the entrepreneurs
regarded the angel’s contribution as being helpful (31%) or extremely helpful (19%).
Nevertheless, nearly half of the investors (47%) and a majority of entrepreneurs
(56%) considered the relationship to be productive and majority of both investors and
entrepreneurs regarded it as consensual. The Lengyel and Gulliford (1997) study
provides updated information on these issues.
Kelly’s PhD study also explored the motivations of angels in becoming involved with
their investee businesses. The typical anticipated involvement by the angels in his
study was 16 hours per month (8 hours face-to-face and 8 hours phone calls and
reading reports) and 40% of investors were employed in the business in some
capacity. Kelly concluded that rather than being a means of defending their interests
(i.e. for protection) business angels get involved in response to specific needs of their
investee businesses. He further notes that involvement is greatest at the early stages,
where the business’s need for experience is greatest (Kelly and Hay, 2003).
Mason and Harrison’s (2002b) study of exits was based on data on 128 investments.
Returns were highly skewed: 47% of exits involved a total (34%) or partial loss, or
broke even in nominal terms, while 23% generated an IRR in excess of 50%. Trade
sales were the main exit route and were used both for successful exits and some that
only broke even. IPOs accounted for only a small proportion of successful exits. Exits
from ‘living dead’ investments were mainly through sales to other shareholders and
new third party shareholders. The median holding period was four years – but this
varied by investment performance. The median holding period for investments that
generated a good or exceptional return was four years, rising to six years for
investments that generated low positive returns and just two years for loss-making and
break-even investments. The most successful investments shared few common
characteristics. A separate analysis of the returns from technology and non-
technology investments found no differences in the returns profiles (Mason and
Harrison, 2004b). Mason and Harrison’s (1996c) earlier study of LINC deals had
noted that some angels take returns in the form of directors’ fees and, less commonly,
2.5 Market Based Estimates
The research summarised to date has focused on the identification of business angel
investors, and has collected data on their investment behaviour, demographics and
Mason and Harrison’s NBAN study found that on average angels commit six days a month on each
investment (Mason and Harrison, 2002a).
attitudes and intentions. Studies that explicitly attempt to measure the scale of the
market as a whole are far fewer in number. One of the few such studies is the risk
capital market analysis undertaken in Scotland, which has profiled all identifiable
equity investment in the unquoted business sector between 2000 and 2005 (Harrison
and Don 2004; 2006). These reports presents the first comprehensive account and
analysis of the early stage risk capital market in Scotland, and indeed anywhere in the
UK, and with the exception of research in Sweden there are no identifiable similar
analyses elsewhere. The analysis is based on a unique specially created database
which records actual investments made in businesses in Scotland and identifies the
investors making those investments (the methodological implications of this research
are discussed in Section 4 below).
The key findings of the initial report are as follows. Over the four years (2000-2003
inclusive) there has been a total of £673m of identifiable risk capital investment in
581 new and young Scottish companies. The early stage equity risk capital market in
Scotland is very much larger than previously estimated – for example, figures from
the British Venture Capital Association suggest that over these four years there was a
total of £119m invested in start-up and early stage businesses in Scotland. There is, in
other words, a large and dynamic early stage risk capital market in Scotland which
channels investment capital from a wide range of institutional and other investors into
start-up and growing companies, and this market is significantly larger than previous
estimates have suggested. In 2003, the Scottish Risk Capital Survey identified £121m
of new investment in Scottish businesses; in the same year the BVCA recorded only
£7m in early stage investment and a total (including management buy out and buy in
investments, which are excluded from this Survey) of £109m. Institutional venture
capital investors dominate the market – in total over the four years they have invested
£527m in Scotland. Much of this investment is not recorded in other market statistics
(such as the BVCA data), either because the institutions are not members of BVCA or
Business angel investors play an important role in the market – over the four years
they have invested £115m in Scottish businesses, equivalent to 27% of all risk capital
investment, excluding the three largest transactions – this is a very important segment
of the overall risk capital market and plays a crucial role in helping develop an
entrepreneurial economy in Scotland. In 2002 and 2003, business angel investment
(£44m) in Scotland was more than twice the level of early stage investment recorded
by BVCA members (£19m). Co-investment by business angels and venture capital
investors in the same deal has been noted as a feature of well-developed risk capital
markets, particularly in the US. This Survey shows that this has occurred in around
11% of investments, but this proportion has fallen from 15% to 6% in 2003 (when
most of the co-investments recorded were follow-on investments). Currently, it
appears that the business angel and institutional segments of the risk capital market in
Scotland are operating largely independently of one another – in part this reflects
different investment preferences and exit expectations (business angel investors are,
for the most part, making smaller investments and are less likely to press for early exit
and returns). Hybrid investors, combining financial returns with policy objectives –
are a small but important segment of the market. Some 90% of the activity of this
investor group is accounted for by recent Scottish Enterprise activities (the Co-
Investment Fund and Business Growth Fund). Although only contributing some £15m
to the risk capital market, they have been represented in 44% of all investments
recorded in 2003. The Harrison and Don reports conclude that these recent Scottish
Enterprise initiatives have made a particular contribution to the funding of smaller
investments and younger companies, and this contribution has been most significant
in a difficult funding environment. The relatively buoyant Scottish risk capital market
in 2003 (by comparison with the national UK situation) is in part attributable to the
catalytic and confidence building impact of these initiatives.
The Scottish research concludes that there is more risk capital being invested in
Scottish early stage businesses than previously estimated. The difficulties in raising
capital reported by many companies and their advisors may, therefore, not be a
function of the shortage of risk capital available in the market but a function of either
a problem in mobilising and making visible the risk capital which is available or a
lack of ‘investment readiness’ in the businesses seeking finance.
This section has reviewed both the published and unpublished research on the UK’s
informal venture capital market. Indeed, the UK, along with the USA, Canada and
Sweden, have attracted the majority of research. Wetzel’s initial studies and the SBA-
sponsored studies in the 1980s and Sohl’s work over the past fifteen years have
contributed to a detailed understanding of business angel investing in the USA;
Riding’s initial research in Ottawa and subsequent national studies have done the
same for Canada (e.g. Short and Riding, 1989; Riding et al, 1993), while Landström is
now building on his initial Swedish study (Landström, 2003) by directing new studies
by PhD students (Månsson and Landström, 2006; Avdeitchikova and Landström,
2005). There have also been one-off studies of angel activity in a variety of other
countries, notably Finland (Lumme et al, 1998), Norway (Reitan and Sørheim, 2001),
Germany (Brettell, 2003; Stedler and Peters, 2003), Australia (Hindle and Wenban,
1999), New Zealand (Infometrics Ltd, 2004), Japan (Tashiro, 1999) and Singapore
(Hindle and Lee, 2002). Mason (2006a) provides a review of the international
literature on informal venture capital.
What is clear from both the UK and international studies is that the vast majority of
the research has had a ‘micro’ focus, profiling business angels, documenting their
investment activity, examining various aspects of the investment process and,
especially in the UK, assessing the impacts of various forms of policy intervention,
notably tax incentives and business angel networks. This emphasis on studying the
process has largely avoided the need to consider methodologies and sampling frames
that would generate representative samples of business angels. Indeed, as this review
makes clear, most UK studies have relied heavily on business angel networks as a
means of identifying business angels, despite concerns about possible bias. The
consequence of this accumulation of a series of micro-studies using questionnaire
surveys of samples, sometimes quite small, focused on specific aspects of angel
profiles and the investment process, and which have relied to a greater or lesser extent
on samples of convenience (notably members of business angels networks), is that
there has been very limited understanding of the development of the market in terms
of scale and scope over the past 15 years. In other countries – mostly lacking business
angel networks, at least until recently – researchers have had to use more imaginative
approaches to identify angels. As a consequence these studies are of greater use when
we come to consider how a robust time series dataset can be developed to measure
business angel activity in the UK (section 4).
3. DEVELOPING A TIME SERIES DATASET TO MEASURE BUSINESS
ANGEL ACTIVITY IN THE UK: DEFINITIONAL CONSIDERATIONS
In the two decades since business angels have been recognised as a focus of research
and policy attention definitional issues have become more problematic. There are at
least two reasons for this. The maturing of the informal venture capital market has
provided more ways in which investors can make investments in unquoted companies,
notably through various forms of angel groups, syndicates and networks, blurring the
distinctiveness of angel investing. Research has added further confusion. Recent
Nordic research, unlike earlier UK typologies (e.g. Coveney and Moore, 1998), has
identified several different types of investor, some of whom deviate from the
conventional definition. For example, Sørheim and Landström (2001) propose a four-
fold categorisation based on the level of investment activity and investment
competence (measured by entrepreneurial experience):
• Lotto investors: low investment activity and low competence in business start-
• Traders: high investment activity but low competence in business start-up;
• Analytical: low investment activity but high competence in business start-up;
• Business angels: high investment activity and high competence in business
Avdeitchikova (2006) has also proposed a four-fold classification based around two
dimensions – investment level and involvement:
• Micro investors: low on both dimensions;
• Fund managers: high on investment activity but low on involvement;
• Mentors: low on investment activity but high on involvement;
• Business angels: high on both dimensions.
Infometrics Ltd (2004), which undertook a government-commissioned study of
business angels in New Zealand, suggested that angels are differentiated on two
dimensions – motivation (guardian, professional, operational expertise, financial
return) and activity (dabblers vs. active)
GEM has contributed further definitional imprecision by reporting on what it terms
“informal investment” – as we have shown above, this is a ‘chaotic’ category which
includes all forms of direct investment in unquoted companies and therefore includes
investments in businesses of both family and non-family members.
The aim in this section is to bring some greater clarity to definitional and
measurement issues. This is an essential preliminary step before we can go on in the
next section to consider data sets.
There are four features that are fundamental to business angels and their investments
and distinguish this form of investing from institutional venture capital.
• First, angels are investing their own money. Because of this, they are able to
make rapid investment decisions without the need to undertake extensive
evaluation or third-party due diligence. No one has ever challenged this
feature of angel investing, although it does occasionally arise as an issue,