Abstract
Innovation is critical for firm and national competitiveness. However, financing innovation is increasingly difficult for early-stage, high-risk projects, as banks and venture capital firms are focusing on later-stage, less risky projects. To fill this gap, US and European entrepreneurs are turning for seed funding to Business Angels (BAs) and Business Angel Networks (BANs). We describe the role of BAs and BANs in the US and Europe from the perspectives of entrepreneurship theory and social network theory. We show how BANs can strengthen ties between entrepreneurs and individual investors under highly uncertain conditions. We also study the links between formal and informal private equity finance, raising wider questions about the funding and performance of clusters of innovation. Finally, we suggest that differences in network characteristics, rather than the availability of projects, explain the large differences in the size and performance of the BA sectors in the US and Europe.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
This uncertainty comes from the difficulty at this time (t = 0) in establishing all the development alternatives possible and determining the probability of each.
- 2.
Startup funding must deal with the same problems facing business finance more generally, namely agency costs and other problems associated with asymmetric information (Denis 2004). These problems are exacerbated during the creation phase.
- 3.
Grants and subsidies include explicit transfers such as US Small Business Innovation Research grants and the various local and regional grants and subsidies provided in Europe, as well as indirect assistance provided by publicly funded or university provided incubators and research parks.
- 4.
A popular aphorism describes these as the “three Fs” (friends, family and fools).
- 5.
- 6.
“Closing gaps and moving up a gear: The next stage of venture capital’s evolution in Europe”, EVCA Venture Capital White Paper, Brussels, 2 march 2010.
- 7.
Summary of private participants in informal capital risk, EBAN
- 8.
In a 2008 study sponsored by the Ministry for Higher Education and Research, and in collaboration with the association France Angels, Ernst & Young documented characteristic patterns of BAs in financing innovative SMEs. “BAs are involved for the most part during the first 2 years of businesses’ existence (42 % of respondents became involved when the business was first created), very often in groups and as minority investors (82 % of participations mentioned were for less than 20 %). They invest in all business sectors but mostly in accordance with their professional background.”
- 9.
In “L’innovation: un enjeu majeur pour la France—Dynamiser la croissance des entreprises innovantes”, Report for the Ministry of Redressement Productif, Jean-Luc Beylat and Pierre Tambourin, April 2013.
- 10.
Potential BAs have never invested in unlisted projects.
- 11.
It should be noted this role is already played by start-up funds and prior to this by incubators. However, not all projects go through these stages.
- 12.
Not all BAs belong to a network and not all networks are in national associations,
References
Ahuja, G. (2000). Collaboration networks, structural holes, and innovation: A longitudinal study. Administrative Science Quarterly, 45(3), 425–455.
Amable, B. (2006). Innovation et compétitivité en Europe. Reflets et Perspectives, 45, 15–30.
Baldwin, C., & Clark, K. B. (2000). Design rules: The power of modularity. Cambridge, MA: MIT Press.
Baum, J. A. C., Shipilov, A. V., & Rowley, T. J. (2003). Where do small worlds come from? Industrial & Corporate Change, 12(4), 697–725.
Burt, R. (1992). Structural holes: The social structure of competition. Cambridge, MA: Harvard Business Press.
Burt, R. S., Hogarth, R. M., & Michaud, C. (2000). The social capital of French and American managers. Organization Science, 11(2), 123–147.
Christensen, C. (1994). The innovator’s dilemma. Boston, MA: Harvard Business School Press.
Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, S95–S120.
De Clercq, D., Meuleman, M., & Wright, M. (2012). A cross-country investigation of micro-angel investment activity: The roles of new business opportunities and institutions. International Business Review, 21(2), 117–129.
Deffains-Crapsky, C. (2002). L’analyse par les options réelles : apports en termes de valorisation de projets innovants et gestion stratégiques des opportunités d’investissement. Cahier de recherche du CREFIB 02-03.
Deffains-Crapsky, C. (2010). Les apports et les limites de l'évaluation des projets innovants par les options réelles. Journées de Microéconomie Appliquée, JMA, Angers, Juin, France.
Denis, D. J. (2004). Entrepreneurial finance: An overview of the issues and evidence. Journal of Corporate Finance, 10(2), 301–326.
EBAN. (2007a). Note synthétique sur les acteurs privés du capital risque informel.
EBAN. (2007b). La contribution des business angels à la réalisation de la stratégie de Lisbonne, au Plan d’Action Communautaire en faveur de l’entrepreneuriat et au C.I.P. 2007–2013. Livre Blanc.
EBAN. (2010). Statistics compendium.
Ferrary, M. (1999). Confiance et accumulation de capital social dans la régulation des activités de crédit. Revue française de sociologie, 40(3), 559–586.
Ferrary, M. (2001). Pour une théorie de l’échange dans les réseaux sociaux. Un essai sur le don dans les réseaux industriels de la Silicon Valley. Cahiers internationaux de Sociologie, 111, 261–290.
Ferrary, M. (2006). Apprentissage collaboratif et réseaux d’investisseurs en capital-risque. Revue Française de Gestion, 163, 171–181.
Ferrary, M. (2009). Les capital-risqueurs comme “transiteurs” de l’innovation dans la Silicon Valley. Revue Française de Gestion, 190, 179–196.
Ferrary, M., & Dibiaggio, L. (2003). Communautés de pratique et réseaux sociaux dans la dynamique de fonctionnement des clusters de hautes technologies. Revue d’économie industrielle, 103, 111–130.
Ferrary, M., & Granovetter, M. (2009). The role of venture capital firms in Silicon Valley’s complex innovation network. Economy and Society, 38(2), 326–359.
Foss, N. J., & Klein, P. G. (2010). Alertness, action, and the antecedents of entrepreneurship. Journal of Private Enterprise, 25(2), 145–164.
Foss, N. J., & Klein, P. G. (2012). Organizing entrepreneurial judgment: A new approach to the firm. Cambridge: Cambridge University Press.
Freear, J., Sohl, H. E., & Wetzel, W. (2002). Angles on angels: Financing technology-based ventures—A historical perspective. Venture Capital, 4(4), 275–287.
Granovetter, M. (1995). The economic sociology of firms and entrepreneurs. In A. Portes (Ed.), The economic sociology of immigration: Essays on networks (pp. 128–165). New York: Russell Sage Foundation.
Harrison, R. T., & Mason, C. M. (2000). Venture capital market complementarities: The links between business angels and venture capital funds in the United Kingdom. Venture Capital, 2(3), 223–242.
Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35(4), 519–530.
Hoang, H., & Antonic, B. (2003). Network-based research in entrepreneurship: A critical review. Journal of Business Venturing, 18(2), 165–187.
Ibrahim, D. M. (2010). Financing the next Silicon Valley. Washington University Law Review, 83(4), 717–762.
Kaplan, S. N., & Strömberg, P. (2003). Financial contracting theory meets the real world: An empirical analysis of venture capital contracts. Review of Economic Studies, 70(2), 281–315.
Kerr, W. R., Lerner, J., & Schoar, A. (2010). The consequences of entrepreneurial finance: A regression discontinuity analysis, Harvard Business School, Working Paper 10-086.
Kirzner, I. M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press.
Kirzner, I. M. (1985). Discovery and the capitalist process. Chicago: University of Chicago Press.
Kizner, I. M. (1997). Entrepreneurial discovery and the competitive market process: An Austrian Approach. Journal of Economic Literature, 35, 60–85.
Klein, P. G. (2012). Entrepreneurship and creative destruction. In B. Miniter (Ed.), The 4% solution: How to unleash the economic boom America needs in the twenty-first century (pp. 116–126). New York: Crown Business.
Knight, F. H. (1921). Risk, uncertainty and profit. New York: Hart, Schaffner and MArx.
Knyphausen-Aufseß, D. Z., & Wesphal, R. (2008). Do business angel networks deliver value to business angels? Venture Capital, 10(2), 149–169.
Larson, A., & Starr, A. J. (1993). A network model for organization formation. Entrepreneurship Theory and Practice, 17(2), 5–15.
Lerner, J. (2009). Boulevard of broken dreams: Why public efforts to boost entrepreneurship and venture capital have failed—and what to do about it. Princeton: Princeton University Press.
Lerner, J. (2010). The future of public efforts to boost entrepreneurship and venture capital. Small Business Economics, 35(3), 255–264.
Litan, R. E., & Robb, A. M. (2012). A market-based approach for crossing the valley of death: The benefits of a capital gains exemption for investments in startups. Available at SSRN: http://ssrn.com/abstract=2000836
Mason, C. M., & Harrison, R. T. (1995). Closing the regional equity gap: The role of informal venture capital. Small Business Economics, 7, 153–172.
McFadyen, M. A., Semadeni, M., & Cannella, J. (2009). Value of strong ties to disconnected others: Examining knowledge creation in biomedicine. Organization Science, 20(3), 552–564.
Mondelli, M. P., & Klein, P. G. (2012). Private equity and asset characteristics: The case of agricultural production. Working Paper, McQuinn Center for Entrepreneurial Leadership, University of Missouri.
Parker, S. C. (2008). The economics of formal business networks. Journal of Business Venturing, 23(6), 627–640.
Powell, W. (1990). Neither market nor hierarchy: Network forms of organization. Research in Organizational Behavior, 12, 295–336.
Schumpeter, J. A. (1911). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Cambridge, MA: Harvard University Press.
Sullivan, M. K., & Miller, A. (1996). Segmenting the informal venture capital market: Economic, hedonistic, and altruistic investors. Journal of Business Research, 36(1), 26–35.
Uzzi, B. (1996). The sources and consequences of embeddedness for the economic performance of organizations: The network effect. American Sociological Review, 61(4), 674–698.
Uzzi, B. (1999). Embeddedness in the making of financial capital: How social relations and networks benefit firms seeking financing. American Sociological Review, 64(4), 481–505.
Williamson, O. E. (1988). Corporate finance and corporate governance. Journal of Finance, 43(3), 567–591.
Wilson, K. E. (2011). Financing high-growth firms: The role of angel investors. OECD Report. Available at SSRN: http://ssrn.com/abstract=1983115
Acknowledgment
We thank Jim Chappelow, Jingjing Wang, and Abel Malik Ola for assistance.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2016 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Deffains-Crapsky, C., Klein, P.G. (2016). Business Angels, Social Networks, and Radical Innovation. In: Bögenhold, D., Bonnet, J., Dejardin, M., Garcia Pérez de Lema, D. (eds) Contemporary Entrepreneurship. Springer, Cham. https://doi.org/10.1007/978-3-319-28134-6_18
Download citation
DOI: https://doi.org/10.1007/978-3-319-28134-6_18
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-28132-2
Online ISBN: 978-3-319-28134-6
eBook Packages: Business and ManagementBusiness and Management (R0)