Screening Criteria for Business Angels Investments

Abstract

Business angels invest directly in unquoted companies managed by someone else who is not a relative and represent an important source of funds for new start-ups (~1.0% of GDP according to the GEM). This doctoral thesis addresses and contributes in two issues in business angels’ research, the disparity of definitions and contradictory evidence on business angels screening criteria in previous literature. The research identifies and discusses 10 definitional issues, investigates how definitional choices are driven by sampling methodologies and to what extent they impact study results. The review of 24 previous studies proves that there are multiple definitions, often chosen due to the sampling methodology employed and that the use of inconsistent definitions leads to study different population of investors with different results. The study advocates for a consensus definition, preferably wide, and proposes a framework to advance towards that. Based on statistical analysis of a database of 215 projects and using three different sources to avoid bias (investor, entrepreneur and project documentation), the research concludes that the screening phase is critical within the investment process (45% rejection rate) and that success is driven by presentational skills, rather than the business opportunity or the entrepreneurial team. Sector, development stage and macroeconomic environment do not influence investment criteria. At the initial screening, business angels take their decisions based on intuitive and intangible aspects, rather than on rational considerations and tangible elements, such as the business opportunity or the entrepreneurs’ credentials. The comparison of results with previous research based on investors recollections, rather than actual behaviour, suggests that investors are not fully aware of the criteria they effectively use. In the informal venture capital market, investment process inefficiencies are as important as market inefficiencies (lack of information or investment projects) previously researched. The findings should lead to assess the measures of support for business angels implemented to date, based on data on big investors, to target smaller investors on issues of diversification, continuity of investment history and avoiding investment process inefficiencies.