The pre-investment behaviour of business angels: a social capital approach

Using insights from social capital theory, this paper examines the pre-investment behaviour of experienced business angels in Norway. Previous research indicates there are considerable inefficiencies in the informal venture capital market, notably information inefficiencies related to the identification of investment opportunities, and problems associated with the screening or evaluation of new investment proposals. The empirical findings show that an investor's previous track record, to a great extent, determines how they can operate in the informal venture capital market. It is quite rational for individuals who have acquired most of their experience in one specific region to make the overwhelming majority of their investments in the same region. It is this regional track record that gives them a competitive advantage in the informal venture capital market. This reasoning also seems to be valid with regard to individuals with industry specific experience, where the regional track record is 'replaced' by an industry specific record. Moreover, these industry specific investors take care of the initial screening themselves, whereas regional investors are predominately generalists who rely more on information provided by their regional networks. The business angels in this study are very concerned with establishing common ground with entrepreneurs and potential co-investors. This establishment of common ground can be viewed as a necessary antecedent for long-term trustworthy relationships.