Tom Lahti

Angel investing: an examination of the evolution of the Finnish market

Since the study by Lumme, Mason and Suomi (1998) (Lumme, A., C.M. Mason, and M. Suomi. 1998. Informal venture capital: Investors, investments and policy in Finland. Boston: Kluwer Academic Publishers) more than a decade ago there has been very limited research on Finnish business angels (BAs). Thus, the primary aim of this study is to provide a more up-to-date picture of angel investing in Finland, reflecting market conditions in year 2006. The results are compared to Lumme, Mason and Suomi (1998) who portray the Finnish BA market in year 1994. In order to understand how the market has evolved over the years, the results are analysed with respect to changes in general economic conditions, the stock market development, the financial system, the entrepreneurial landscape and the marketplace for BAs. The current study draws upon interviews with 53 Finnish BAs. The results suggest that Finnish BAs have reduced their exposure to risk by increasing their prevalence to syndicate investments, investing in more mature ventures, holding more negligible shares of ownership, being more strict in their screening and placing more focus on due diligence. However, their involvement in the operations of the companies they fund has declined over the years. The analysis indicates that the change in the marketplace with the greatest impact on market development has been the establishment of a business introductory service. It has increased transparency in the market, and enables the formation of investment syndicates and transferral of investment practices. Based on the results implications are provided for BAs, entrepreneurs and policy-makers.

The role of advisors in the venture capital investment process

Despite the extensive research on venture capitalists and entrepreneurs, there is at least one group of actors whose role has been overlooked, namely advisors that specialise in helping entrepreneurs raise venture capital funding. This explorative study aims to fill this gap. Based on qualitative case study data, this paper shows that the activities of advisors have several benefits for entrepreneurs seeking funding. Advisors appear to accelerate the process of acquiring funding and improve the terms and conditions of the funding. By participating in the preparation of written documents that are required when approaching investors advisors can contribute to increasing the investment readiness of an entrepreneurial venture. They also typically participate in investment negotiations. This may reduce the possibility that negotiations between the venture capitalist and the entrepreneur become confrontational which could, in turn, adversely affect the venture capital–entrepreneur post-investment relationship. The findings in this study strongly suggest that using advisors increases the likelihood that entrepreneurs will successfully obtain venture capital funding. This paper recommends that inexperienced entrepreneurs in particular should seek support from advisors when seeking to raise venture capital.

The value-added contribution of advisors in the process of acquiring venture capital

This article examines the determinants of the value-added contribution offered by advisors to entrepreneurs seeking venture capital (VC) funding. It hypothesizes that the contribution of advisors is particularly helpful in addressing problems of asymmetric information and uncertainty. The study develops seven hypotheses derived from agency theory using data from questionnaire responses given by entrepreneurs that used advisors to acquire VC. The results indicate that advisor value-added contributions are substantial when entrepreneurs have limited experience in dealing with venture capitalists (VCs). Other determinants are stage of venture development, level of innovation and the entrepreneur’s industry sector experience.

Does startup experience matter? Venture capital selection criteria among Israeli entrepreneurs

Abstract In this study we are concerned with understanding Israeli entrepreneurs’ selection criteria in choosing a venture capital (VC) firm. Our primary aim was to investigate how startup experience impacts entrepreneurs’ trade-offs between resource-related criteria and criteria related to the conditions of the deal. Hypotheses are drawn from agency theory, the resource dependence perspective and extant VC research. Data is gleaned from interviews with 144 Israeli entrepreneurs that are either in the process of acquiring VC or have recent experience of raising it. Hypotheses are tested with ordinal logit models. Results demonstrate that there is a negative relationship between startup experience and the importance entrepreneurs attach to valuation, and that the importance attached to a VC firm’s network and reputation moderates this relationship. In addition, the importance attached to a VC firm’s network moderates the relationship between startup experience and the importance assigned to contractual terms. Furthermore, results indicate that while inexperienced entrepreneurs attach more importance to valuation than experienced ones, they tend to emphasize it less when they seek to gain access to a VC firm’s network of contacts. Entrepreneurs are shown to be more concerned about valuation when they approach less reputable VC firms, particularly if the entrepreneur has substantial startup experience.

Business angel networks: a review and assessment of their value to entrepreneurship

The chapter focuses on an initiative that has become popular among policy-makers around the world in order to foster business angel activities, namely, business angel networks (BANs). BANs have been established to increase the transparency and improve the efficiency of the business angel market by providing a channel of communication that enables entrepreneurs seeking finance to come into contact with business angels, and at the same time enable business angels to receive information on investment opportunities without the need to compromise their anonymity if so desired. The authors describe the development of BAN activities in different countries and evaluate their benefits and drawbacks. The chapter identifies different kinds of BANs and the different ways that BANs can provide their deal-brokering service and deliver supplementary functions such as training of entrepreneurs and business angels, advisory service, contract templates and the development of good practice. Evaluations of BANs have shown both positive impacts on investment activity as well as negative effects, hence there is no conclusive answer to whether there is a need for public sector interventions to support the establishment and operation of BANs.