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Business angels in the UK: a response to Stevenson and Coveney.

DESPITE THE IMPORTANT ROLE OF THE informal venture capital market in helping to fill the small firm finance gap, described by the Advisory Committee on Science and Technology (1991, p41) as being "a pre-requisite for a vigorous enterprise economy", it remains under-researched. For example, our own research, based on a survey of 86 business angels, initially published as a working paper in 1991 (Mason et al, 1991) and published in the academic literature three years later (Mason and Harrison, 1994), has been the main source of evidence in the UK on the characteristics of business angels, their investment activity and motivations. However, a study by Stevenson and Coveney, first published in 1994 in Venture Capital Report, an investment opportunities bulletin, and subsequently in the academic literature (Stevenson and Coveney, 1996) (1) is critical of our findings. They make two claims:

* it has led to the creation of 'fallacies' about business angels in the UK;

* because they attribute our research to have "significantly influenced" UK government policy on informal venture capital, it has resulted in inappropriate policies.

We wish to defend the conclusions that we reached in our study from these criticisms and in doing so to raise some wider issues about researching the informal venture capital market.

Sample Differences

It needs to be emphasised at the outset that informal investors are extremely difficult to identify and locate. They have a preference for anonymity, there are no directories of individual investors and no public records of their investment transactions (Wetzel, 1981). They may also be reluctant to respond to research surveys because of the private and personal nature of the subject matter and the fear of being identified and then deluged with investment proposals (Haar et al, 1988). The size and characteristics of the population of informal investors is therefore unknown, and probably unknowable (Wetzel, 1983). Consequently, in the absence of a population listing it is not possible to undertake any survey which is based on a representative sample of informal investors. The main approaches that have been used to identify samples of informal investors are: (i) large-scale postal surveys, often using purchased mailing lists, of various groups of individuals with a sufficiently high discretionary income that they might be involved in informal investment activity; (ii) contacting informal investors through the firms in which they have invested; (iii) the snowball, or nominated sample, approach which seeks referrals to informal investors from lawyers, accountants, bankers, local business organisations and known informal investors. Each approach has advantages and disadvantages (Mason and Harrison, 1994).

Both our own study and that of Stevenson and Coveney were based on the first approach (2). Stevenson and Coveney obtained returns from 484 respondents. In quantitative terms this is an impressive figure and is much greater than our sample base. Stevenson and Coveney believe that this makes their findings more reliable than those of our study. However, they make the mistake of confusing sample size with sample representativeness.

We deliberately compiled our sample of business angels from a variety of different sources in the hope that any biases in individual sources would be cancelled out. Thus, our sample comprised business angels that were identified from ten different mailing list sources as well as from personal networking. No single source provided more than 20 per cent of the sample. In contrast, Stevenson and Coveney's sample was drawn from a very narrow range of sources, with 56 per cent of responses from current or past subscribers to Venture Capital Report (VCR) and a further 19 per cent from people who had made enquiries about VCR.

Another important difference between the two studies is that Stevenson and Coveney include what they term corporate angels--companies which make minority equity stakes in unquoted companies--in their sample. They comprised 9 per cent of responses. We certainly do not wish to downplay the importance of what has elsewhere been termed corporate venturing as a source of finance for smaller businesses (McNally, 1995). However, to group corporate venture capital investments with business angel investments is misguided because of the contrasts between these two types of investor in terms of their motivation, investment decision-making process and type of investments made.

Third, the Stevenson and Coveney sample contained a significant proportion of inactive angels: 37 per cent of responses comprised investors who had not made any investments ('virgin' investors) and a further 9 per cent had not made any investments in the preceding three years ('latent' investors). In our sample, 30 per cent of investors had not made any investments, although the vast majority were actively looking for investments. The high proportion of inactive investors in the Stevenson and Coveney sample may reflect the fact that a characteristic of business angel networks, such as Venture Capital Report, is that a significant minority of subscribers are 'voyeurs' rather than serious investors.

We believe that these features of the Stevenson and Coveney sample of business angels has produced a set of findings which are distorted and do not accurately reflect the characteristics of business angels in the UK (3). It is therefore our view that these differences in sample composition lie at the heart of the debate between Stevenson and Coveney and ourselves. We certainly do not claim that our sample is beyond criticism. However, we do believe that it contains fewer systematic biases and so provides a superior, although certainly not perfect, profile of informal venture capital activity in the UK.

Size of the Informal Venture Capital Market

In estimating the size of the informal venture capital market in the UK we took an average investment size of 20,000 [pounds sterling]. This was based on evidence from two surveys: the median investment size of active investors in our survey of 86 investors was 10,000 [pounds sterling] and a subsequent survey of investors who were registered with LINC, another business angel network, reported a median investment size of 30,000 [pounds sterling] (Mason et al, 1992; Mason and Harrison, 1996a). However, the median investment size in Stevenson and Coveney's survey is 40,000 [pounds sterling]. The investors in Stevenson and Coveney's study also invest more frequently and have larger informal investment portfolios. Stevenson and Coveney therefore argue that the UK's informal venture capital market is much larger than we had previously estimated.

However, the Stevenson and Coveney figures are biased upwards by three factors. First, it includes corporate angels, whose median investment size of 100,000 [pounds sterling] is significantly larger than that of two of the three types of active angel identified in the study. Excluding corporate angels would reduce the overall median size, although it would still remain significantly higher than that of our study. The second factor which biases the average investment size upwards is that it seems reasonable to assume that investors who pay subscriptions to join business angel networks will comprise more serious and wealthier informal investors who are actively seeking investment opportunities and so will invest more frequently and make larger investments. Indeed, as noted above, our own research found that the average size of investments made by investors registered with LINC was three times larger than that of our general sample of business angels (of which only a minority were members of any business angel network) and the average size of investment portfolio was also significantly larger. A further consideration is that different business angel networks are serving different market niches. Specifically, investments that are made through private sector networks are significantly larger than those made through locally/regionally focused public sector and not-for-profit networks (Mason and Harrison, 1995; BVCA, 1995). Third, business angels who are members of business angel networks comprise a minority of all business angels (although no research has established what the proportion is), thus it is inappropriate to extrapolate figures based on business angel network members to the entire business angel population. Fourth, the size distribution of informal venture capital investments may conform to a bi-modal form. A study by 3i plc (1994) comments that "there appear to be two types of angel. One will invest around 25,000 [pounds sterling] and the other around 125,000 [pounds sterling] in each situation". The research literature is consistent in identifying the first type of angel as being much more common (BVCA, 1995; Mason and Harrison, 1996b; Mason and Rogers, 1996). In our view, the methodology used by Stevenson and Coveney has resulted in under-sampling the first of these distributions and over-sampling from the second.

The Role of Distance in the Investment Decision

Our findings indicated that distance plays a central role in the investment decision, with two-thirds of business angel investments being made in businesses located within 100 miles of the investor's home. Research in countries as diverse as the USA (Freear et al, 1994), Canada (Riding et al, 1993), Sweden (Landstrom, 1993) and Finland (Suomi and Lumme, 1994) have also reported that the majority of business angel investments are made close to the investor's home or work. The widely accepted explanation for this pattern of investing is that it is because most business angels are 'hands on' investors, they are likely to make regular visits to their investee businesses and so wish to minimise the travel time involved. This conclusion is disputed by Stevenson and Coveney. However, they do so using inappropriate evidence.

Stevenson and Coveney base their conclusion on answers by investors to questions on the importance of the location of the business in their investment appraisal and willingness to invest in businesses located more than 200 miles/three hours from their home/office. In other words, Stevenson and Coveney present evidence on investment preferences whereas our evidence was based on actual investments. No data are presented on the actual investments made by Stevenson and Coveney's sample of investors. However, as preferences are not a reliable guide to behaviour it cannot be assumed that the actual investments made by these investors will reflect their preferences (4). Moreover, it could be argued that Because Venture Capital Report is a national business angel network, providing information on investments throughout the country, it will disproportionately attract investors whose investment activity is not constrained by distance. Conversely, investors who are only interested in investing locally are more likely to join a business angel network which operates on a local/regional scale. A further point is that Stevenson and Coveney over-interpret their data: for each of their five types of business angel only a minority are willing to invest more than 200 miles from home, the proportions ranging from 16 per cent to 47 per cent.

All of this is not to deny that some long distance investments by business angels do occur, and understanding the circumstances under which such investments occur is an important issue in any informal venture capital research agenda (Mason, 1996). However, they constitute a minority of informal venture capital investments.

An alternative critique of the finding that the majority of business angel investments are local, although not one which is made by Stevenson and Coveney, is that it reflects information availability. In other words, it could be argued that the reason that most business angels invest close to their home is because their knowledge of potential investment opportunities is greater than that of more distant opportunities. The logic of this argument is that investors who are members of national business angel networks should not exhibit a tendency to invest locally. However, the available evidence is to the contrary. Our survey of investors registered with LINC found that the majority of their investments were within 100 miles of their home (Mason et al, 1992; Mason and Harrison, 1996b). Other evidence is provided by local business angel networks that have established links with national services (5) to enable their local investment opportunities be seen by investors in other parts of the country: despite this, the vast majority of businesses still raise finance from local investors (Harrison and Mason, 1996).

Implications for Policy

Stevenson and Coveney are also critical of the policy recommendations that we drew, the main one being to advocate the establishment of local/regional business angel networks to provide a channel of communication between business angels and entrepreneurs seeking advice (Mason and Harrison, 1993a; 1993b). In Stevenson and Coveney's study the majority of business angels are reported as preferring the formation of a single national business angel network. The evidence which Stevenson and Coveney present which purports to show that the location of the investment opportunity is not an important consideration for most business angels is used as additional evidence to support this conclusion. Second, they find that a majority of angels wish such a network to be run by a private sector organisation. Third, the preferred form in which investors wish to see investment proposals was a four or five page summary--the format used by VCR. However, these conclusions reflect the weighting of the sample towards VCR subscribers. A sample which comprised investors from a greater variety of networks and others who were not members of any network could be expected to lead to significantly different policy recommendations.

Stevenson and Coveney advocate the establishment of one national business angel network. However, their own evidence highlights marked differences in investment preferences between types of angel, notably concerning the importance of investing close to home. This suggests that the single network proposal of Stevenson and Coveney is unlikely to satisfy more than a minority of investors.


The informal venture capital market comprises an invisible population whose size and characteristics are unknown and unknowable. Researchers therefore typically use 'samples of convenience' when studying this market. This has two consequences. First, each sample will be unrepresentative, although there is no way in which the extent of this unrepresentativeness can be assessed. Second, studies will not be fully comparable because each researcher takes a different slice of the population. The implication is that studies which seek to profile the informal venture capital market should be based on a number of samples of convenience so that the effect of individual sample biases will be diluted. In process-based studies, however, sample bias is less likely to be a problem (Mason and Rogers, 1996).

Stevenson and Coveney claim that their study provides a superior profile of the UK's business angel population to that which we produced some six years ago. In particular, they dispute some of our key findings, notably those concerning the size and frequency of investments by business angels and the role of distance in the investment decision. This, in turn, leads to differences between ourselves and Stevenson and Coveney in the policy proposals concerning business angel networks. We have argued in this note that the profile of the UK business angel population that Stevenson and Coveney draw from their survey is extremely suspect because its composition is heavily biased towards VCR subscribers and to investors who are or have been members of business angel networks.


3i plc (1994), Angel Investors, London, 3i plc.

Advisory Council on Science and Technology (ACOST)(1990), The Enterprise Challenge: Overcoming Barriers to Growth in Small Firms, London, HMSO.

British Venture Capital Association (1995), Report on Informal Venture Capital Activity, London, BVCA.

Freear, J., Sohl, J. E., and Wetzel, W. E. (1994), 'Angel and Non-angels: Are There Differences?', Journal of Business Venturing, 9, pp109-123.

Haar, N. E., Starr, J., and MacMillan, I. C. (1988), 'Informal Risk Capital Investors: Investment Patterns on the East Coast of the USA', Journal of Business Venturing, 3, pp11-29.

Harrison, R. T., and Mason, C. M. (1996), 'Developing the Informal Venture Capital Market: A Review of DTI's Informal Investment Demonstration Projects', Regional Studies, 30, pp765-772.

Landstrom, H. (1993), 'Informal Risk Capital in Sweden and Some International Comparisons', Journal of Business Venturing, 8, pp525-540.

McNally, K. N. (1995), Inter-firm Collaboration: A Study of Corporate Venture Capital in the United Kingdom, PhD thesis, University of Southampton.

Mason, C. M. (1996), 'Informal Venture Capital: Is Policy Running Ahead of Knowledge?', International Journal of Entrepreneurial Behaviour and Research, 2 (1), pp4-14.

Mason, C. M., and Harrison, R. T. (1993a), 'Strategies for Expanding the Informal Venture Capital Market', International Small Business Journal, 11 (4), pp23-38.

Mason, C. M., and Harrison, R. T. (1993b), Increasing the Supply of Informal Venture Capital: A Guide to Setting-up a Business Introduction Service, Sheffield, Department of Trade and Industry, Small Firms Policy Branch.

Mason, C. M., and Harrison, R. T. (1994), 'The Informal Venture Capital Market in the UK', in Hughes, A., and Storey, D.J. (eds.), Financing Small Firms, London, Routledge, pp64-111.

Mason, C. M., and Harrison, R. T. (1995), 'Informal Venture Capital Investment Activity Through Business Introduction Services: Is There Still a Role for Public Policy?', Frontiers of Entrepreneurship Research 1995, Babson Park: MA, Babson College, pp479-493.

Mason, C. M., and Harrison, R. T. (1996a), 'LINC: the Enterprise Agency Role in Promoting Informal Venture Capital', in Harrison, R. T., and Mason, C. M. (eds.), Informal Venture Capital: Evaluating the Impact of Business Introduction Services, Hemel Hempstead, Woodhead-Faulkner, pp119-141.

Mason, C. M., and Harrison, R. T. (1996b), 'Informal Venture Capital: A Study of the Investment Process and Post-investment Experience', Entrepreneurship and Regional Development, 8, pp105-126.

Mason, C., and Rogers, A. (1996), 'Understanding the Business Angel's Investment Decision', Venture Finance Working Paper No. 14, Southampton, University of Southampton.

Riding, A., Dal Cin, P., Duxbury, L., Haines, G., and Safrata, R. (1993), Informal Investors in Canada: the Identification of Salient Characteristics, Ottawa, Carleton University.

Stevenson, H., and Coveney, P. (1994), Survey of Business Angels, Henley on Thames, Venture Capital Report Ltd.

Stevenson, H., and Coveney, P. (1995), 'Business Angels: An Untapped Source of Venture Capital', Management 2000, 1(1), pp24-35.

Stevenson, H., and Coveney, P. (1996), 'A Survey of Business Angels', in Blackburn, R., and Jennings, P. (eds.), Small Firms: Contributions to Economic Regeneration, London, Paul Chapman Publishing, pp37-48.

Suomi, M., and Lumme, A. (1995), Yksityishenkilot Paaoma- Sijoittajina Suomessa (Informal Private Investors in Finland), Helsinki, SITRA (with English summary).

Wetzel, W. E. (1981), 'Informal Risk Capital in New England', in Vesper, K. H. (ed.), Frontiers of Entrepreneurship Research, 1981, Wellesley: MA, Babson College, pp217-245.

Wetzel, W. E. (1983), 'Angels and Informal Risk Capital', Sloan Management Review, 24, summer, pp23-34.


(1) Their original 1994 publication did receive considerable coverage in newspapers. It was also presented at the 1994 ISBA Small Firms Policy and Research Conference in Sheffield and is published in the edited collection of selected conference papers (Stevenson and Coveney, 1996). The paper has also been published in the popular management literature (Stevenson and Coveney, 1995).

(2) Our study did not rely exclusively on mailing lists: 60 of the 86 were replies to the mailing list survey, 13 responses were obtained through the snowball approach, 12 came through an enclosure in Venture Capital Report and one was from an investor who was contacted after advertising for investment opportunities in the Financial Times.

(3) Stevenson and Coveney want it both ways. They argue that their survey covers a more typical cross-section of angels, but then also use their findings to make conclusions regarding the profile of investors registered with business angel networks.

(4) This is supported by evidence from Mason and Rogers (1996). But interestingly, in this sample of 19 business angels a number of them had made investments in businesses that were located in places that were beyond their preferred geographical limit.

(5) For example, Venture Capital Report, NatWest Angels Service and LINC.

Dr. Colin Mason is a Reader in Economic Geography at the University of Southampton, England, and Professor Richard Harrison is Professor of Management Development at the University of Ulster, Northern Ireland. This note defends our study of informal venture capital in the UK from the criticisms that it has created fallacies about business angels and made inappropriate policy recommendations. We suggest, first, that the Stevenson and Coveney research is based on an unrepresentative sample of investors, and second, that they have made errors in interpreting their data. Consequently, their conclusions about the scale and nature of investment activity of business angels in the UK must be regarded as suspect.
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Title Annotation:Research Note
Author:Mason, Colin M.; Harrison, Richard T.
Publication:International Small Business Journal
Geographic Code:4EUUK
Date:Jan 1, 1997
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