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Issues of SME Entrepreneurs and Investment Aspects

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Entrepreneurs who wish to transform their business dreams into reality will one way or another reach out for the external finance. Many new entrepreneurial start-up businesses do not obtain start-up financing (Gruber, 2004; Mason & Harrison, 2004b). Private individual investors with a high net worth, known as business angels, represent the largest source of start-up financing for new entrepreneurial businesses (Aernoudt, 2005a). Establishment of new businesses is vital to the development and growth of the country's economy (Reynolds et al., 2003). Since the first publication on a business angel was published by (Wetel, 1981), many authors have researched on the informal investment market and studied closely monitoring business angels' characteristics, investment criteria and issues related to an investment. According to (Masons & Harrison, 2000), it is cited that over the past generations many researches have been carried out in different countries and compared with each other.

This dissertation will discuss about the mind of an investor and how they operate in terms of investing their financial assets in a start-up business they believe in succeeding. The main reason is to broaden our understanding of investment aspects of a business angel and how an entrepreneur should respond to it. To find out information sources on business start-ups, refer (Appendix 1).

Problem Discussions

Many business entrepreneurs do not have the luxury of initial capital that's needed to start-up a new business as it requires a vast amount of finance equity (Clarke, 2005; Sohl, 2006). How do entrepreneurs find the initial capital and which investor will trust the business ideas and fund the company? What is the difference between a good investment and a poor decision? What are the requirements of a business angel? These are the main issues SME business starters go through in the initial stages of a business (Wiltbank & Boeker, 2007). The answers for all these issues vary depending on several criteria. For example, it could vary due to the type of the business the entrepreneur wish to start, the capacity of the risk involved, the return of investment period and especially the preference of the entrepreneur working alone or with the influence of the investor (Kaplan & Schoar, 2005).

The dissertation tries to reach active business angels' view points on the issues of SME entrepreneurs and investment aspects. The researcher is confident that this thesis will benefit both the business angels and entrepreneurs.

Introduction Of The Research Subjects

According to a survey conducted by the (EIRO), the government's Bolton Committee in its 1971 report clarified that there is no single definition to explain Small to medium enterprises because of the wide diversity of businesses that operate in the United Kingdom. The report also explained that small to medium business varies according to the type of sector it operates. However section 249 of the Companies act of 1985 affirms that a small company will have to attribute at least two of the following characteristics;

  • Turnover less than GBP 2.8 million
  • Total balance sheet less than GBP 1.4 million
  • Employees less than 50

And a medium sized entrepreneur should operate under the following regulations;

  • Turnover less than GBP 11.2 million
  • Total balance sheet less than GBP 5.6 million
  • Employees less than 250

However in real practice, business functions that operate under small to medium terms, take on a range of working definitions depending on their business objectives (Leedy & Ormfod, 2001).

EIRO - European Industrial Relations Observatory

Formal And Informal Venture Capitalists

Venture Capital is also known as "risk investment" (Langberg, 2004). Risk investment is invested as shares and the financier expects a superior “rate of return" to recompense for the amount of risk invested (Kelly & Hay, 2003). There are 2 main types of venture financing in the UK and they are; formal venture capitalists (large financial institutions) and informal venture capitalists (wealthy private investors commonly known as "business angels").

The UK Formal Venture capitalism began in the 18th century (Harding & Bosma, 2007). During that time Entrepreneurs found affluent individuals to get support for their new businesses. This informal tradition of funding eventually formed a business trade by a number of venture capital firms created by many wealthy. Currently there are over 120 venture capital establishments in the UK, which fund billions of cash annually to the UK SME market (Frielinghaus et al., 2005).

Informal venture capitalists are mainly recognized as Business Angels who are wealthy individuals with a high class reputation of managing well run businesses (Masson & Harrison, 2004). As investors business angels bare a larger risk than venture capital firms as they have to be liable for the loss of the investment incase the business they invest lose out. On the other hand venture capital firms have many investors who can be hand in hand to one another in a bad situation (Masson & Harrison, 2004). Business angels are more common in UK where they tend to invest more on SME businesses where banks and venture capital firms decide not to, which will be further discussed under evidence analysis (Madill et al., 2005).

Business angels tend to be get more closer to the entrepreneur with a higher level of involvement in the firms operations, which shows that their choice of target firms are somewhat different than venture capital firms' requirements and business angels' investment decisions are made solely on the basis of the relationship between the entrepreneur and the investor (Masson & Harrison, 2002). Although entrepreneurs could use formal & informal investors at different stages in the business as shown in the (figure 1), it shows where business angels are needed where we will further discuss later on (Aernoudt, R., 1999).

Figure 1: Financial sources and their involving stages

Source: (VENTURE CAPITAL, 1999, VOL. 1, NO. 2, 187 – 195)


  • Understand a business angel, an entrepreneur and their relationship in a SME start-up businesses in UK
  • Identify detailed requirements of business angels when it comes to an investment
  • Determine how different countries & cultures undertake investments

Literature Review

This literature review is concerned about the academic groundwork of the research objectives which inquires about investment categories business angels tend to invest in a small to medium sized business sector. It also looks at how different authors have elucidated about the investment natures of different countries like New Zealand, Denmark, Sweden & etc.

In order to give a clear structure of this academic review, it will be categorized into subsections to converse different authors' views about the research objectives. First the review will discuss about the academic Theories of investments. Then it looks at Business angels and entrepreneurs in the UK. Finally the review will investigate different countries' nature of investments in their own markets.

2.1 Theories of Investment

There are several investment theories defined and compared by many authors. This thesis mainly focuses on informal investors who wish to invest on SME start-up businesses. Although Stock market related investment theories are irrelevant for our objectives it will be impolite to ignore discussing all investment theories. Therefore let's investigate the theories and in the later chapters discuss the practical concepts (evidence) used currently by successful investors.

Among the following theories, Efficient Market Theory will be related to investment in stock listed companies and “principal-agent, prisoner's dilemma framework & resource based theory” will be about business angels investing in SME businesses.

2.1.1 Efficient Market Theory (EMT)

According to (Burton Malkiel, 1973), the stock values that show in the stock market almost define where the company is in its territory and how well it performs compared to its competitors. He suggests that stock prices may not always be accurate but it can be correct most of the time. On the other hand few business managers disagree, explaining that there company's values are priced unfairly and stock prices do not accurately replicate the performance of their companies (Burton Malkiel, 1973). The following discussion will communicate what efficient market theory is about and explore the arguments against it. According to (Michael Firth, 1975), it is stated that there were many academic researches carried out to monitor the share price behavior by investment advisory firms and investors to obtain profitable investment strategies.

What is EMT or EMH?

(Burton Malkiel, 1973) explained that Efficient Market Theory (EMT) is also known as Efficient Market Hypothesis (EMH) on a more technical term. This theory is a method of defining how stock values behave the way they do in terms of investment decisions. (Eugene Fama, 1965) later categorized EMH into three sub assumptions and they are as follows;

1. Weak form (EMH)

This method assumes that current stock values replicate all past information about the specific company such as performance measurements, returns & etc. By analyzing the stock's price chart, it can help the investors verify as to what the future holds for the company's stock values (Eugene Fama, 1965).

2. Semi strong (EMH)

The assumption built on this method is that all the publicly available information and historical information replicates the values of a company's stock prices in the market. So the investors could gain more knowledge and confidence through a company's financial statements and recent developments. It will enable the investors to judge the company future performance (Eugene Fama, 1965).

3. Strong form (EMH)

This method expressed that, other than publicly available information, the investors get an inside look into the company which largely reflects the stock value (Eugene Fama, 1965).

Principal Agent Theory

In general terms Principal Agent theory is defined as a business management framework to observe the behavior between employer & contractor or employer & employees (Spence and Zeckhauser, 1971; Ross, 1973). So here this theory can be applied to the business angel & entrepreneur relationship and discuss its implication on the investment process (Jenson and Meckling, 1976; Harris and Raviv, 1978).

In the corporate business, the principal (Business angel) usually appoints the agent (manager) or else make sure the entrepreneur works according to the principal's ideas in the business (Jenson and Meckling, 1976). The principal usually make sure that the agent's business intentions are as similar to him/her (www.financemind.com).

In other words, the principal wishes to make sure that the business runs well and succeed the way he/she believes best (Eisenhardt, 1989). But on the other hand, over an informational advantage the agent could think otherwise for the business. This is where the problem of shared risks arises as (Eisenhardt, 1989) explains, where the Investor (principal) and the agent (manager) could end up having different opinions towards the business.

The agency theory is widely used in venture capitalism (Bruton, Fried & Hisrich, 2000a). Having conflicts due to differences in interests, it is essential to minimize these risks as (Bruton, Fried & Hisrich, 2000b) agrees with Eisenhardt. To reduce these risks investors make sure that they actively monitor the companies they invest and build a better and close relationship with each other (Busenitz, Fiet & Moesel, 2004). According to (Sweeting & Wong, 1997), using a principal agent theory to evaluate a business angel investment is not highly recommended anymore. It is much better to have a mutually agreed relationship. The agency theory shows that money motivates both the principal and the agent (Busenitz, Fiet & Moesel, 2004). But financial motivations or economic factors do not relate business angel's relationship with the entrepreneur in this theory (Wijbenga et al., 2003).

Prisoner's Dilemma Framework (PDF)

This is yet another theory that can be used in an investment study. In this framework there can be either a conflict or a development between the two parties involved (Cable & Shane, 1997). In this theory, both parties can either go in their separate interests and gain a certain pay off or co-operate with each other and achieve a higher pay off (Bruton, Fried & Hisrich, 2000). The prisoner's dilemma framework promises better fitting for the business angels and the entrepreneurs because it does not presume a hierarchical relationship between the two parties (Bruton, Fried & Hisrich, 2000; Cable & Shane, 1997). Still the PDF theory only focuses on the investor – entrepreneur relationship and not any of the business angel investment activities or impacts. It concludes that the theory is not suitable enough to define a business angel & entrepreneur relationship (Cable & Shane, 1997).

Resource Based Theory

The resource based theory has many influences on the entrepreneurship. Business angels can contribute many resources other than cash it self. According to Freear, Sohl and Wetzet (2002), angel investors can contribute five types of resources to an entrepreneur: Human, physical, social, organizational & financial.

Human capital can be taken as angel investors' contribution of business knowledge, skills and business experience to the firm (Erikson & Nerdrum, 2001a). Social capital can be gained when business angels provide their business contacts (Angel networks). By this, the entrepreneur has the opportunity to meet other investors and extend the funding possibilities to the business. Physical resources can be machines or factories and organizational capital can be described as the influence and advice the investors can give for the business for an example making the business improve on its experience (Erikson & Nerdrum, 2001b).

Financial capital consists of the funding provided in the beginning of the start-up phase (Cassar, 2003). By far this presumed to be the best suited theory to define a relationship between a Business angel and an Entrepreneur where all aspects are covered (Rose, 2005).

Summary Of Theories

Looking back at the efficient market theory, Agency theory, Prisoner's dilemma framework and Resource based theory; it seems to be that the “Resource based theory” is the most suitable theoretical framework for the Business angel investments. However the Resource based theory has to be amended with few assumptions: Human capital should be taken as the (knowledge, skills & business experience) investors contribute with (Ardichvili et al. (2002).

Although we discussed the above theories, many researchers have described and tried to apply other similar theories to the investor - investee relationship [Example: Procedural Justice (Busenitz, Fiet & Moesel, 2004), learning and knowledge-based view (De Clercq & Sapienza, 2002), resource exchange theory (Gomez-Mejia, Balkin & Welbourne, 1990)].

All the investment theories have a common characteristic that have only a few relevant investment features in them to the investor-investee concept. To make it applicable for the Business angels and entrepreneurs all these theories should have few amendments and adaptations (Sapienza, Manigart & Vermeir, 1996).

Small And Medium Enterprise (SME)

William Kendall, the Chief Executive of Whole Earth Ltd stated, “SME business is a fantastic place to work. You have to think innovatively to be an entrepreneur. It's thrilling and it's enjoyable.”

According to (European Industrial Relations Observatory) there is no general definition for SME. But the (Government's Bolton Committee, 1971) cited that the characteristic of a SME firm is a self-sufficient business being owned by a single owner with a small market share. The report also stated that the size of the SME changes in different industries.

Although it is hard to give one specific definition for SMEs, it can be measured and classified by numbers (employees & revenue rates). The defining measurements are as follows:

Definitions: (The Department for Business, Enterprise and Regulatory Reform – BERR, UK) has defined SME with 3 types of measurements and those are based on amount of employees:

Micro firms: 0-9 employees;

Small firms: 0-49 employees and

Medium firms: 50-249.

The (European Commission) changed the definition of the SME to increase the partnerships and innovations. The definition which took affect on 2005 is: “ A Micro, Small and Medium-sized enterprise (SME) is made up of firms which employ less than 250 employees and have yearly revenue less than 50 million euro”.

Importance Of SME In The Uk

The country has raised the level of growth productivity in the last era reducing the competition gap between other countries like US, France & Germany (BERR, 2008).

Currently UK is reacting well to the global prospects and challenges. The growth of the SME market increases each year promising to boost the economy of the country. According to (European Business Angels Network (2007) Dissemination Report on the Potential for Business Angels Investment and Networks in Europe), the employment and annual revenue contribution of the SME industry as a whole is more than 50 percent of the total.

The UK government provides necessary support for people to step up and start their innovative business to increase the competition level of the country (www.berr.gov.uk).

The Entrepreneur

Earlier it was discussed that previously recognized agency theories explains that the investor, ensuring a healthy relationship is highly regarded as a successful investment aspect in an investment (Kelly & Hay, 2003). Therefore exploring more about what authors have studied about entrepreneurs and investors is vital.

The difference between a formal venture capitalist and a business angel is that a venture capitalist invests looking at the company and its ability to perform (Schramm, 2004). On the other hand the business angel focuses mostly on the entrepreneur to make sure there can be a good business relationship (Mark and Robinson 2000, p138). The entrepreneur is the only key to get the funding needed for a start-up business. As an entrepreneur, it is vital to gain the investors trust and confidence in the business idea. According to (Osnabrugge & Robinson 2000, p123), it is cited that during a business start-up there is a high percentage of entrepreneurs failing to make good management decisions in the initial stages. It is very sensible for an entrepreneur to seek a business angel as they pay special interest on the business they invest in with all their resources including non-financial contributions. It could help fill all the management weaknesses of an initial stage of the business and save huge amounts of consulting and managerial costs (Mason and Stark, 2004).

Entrepreneur Evaluation

(Osnabrugge & Robinson, 2000) had explained that entrepreneurs should be aware that the investor not only pays attention on the business proposition but also the entrepreneur himself to ensure the safety, confidence, enthusiasm and the ability to depend on the entrepreneur. Trust is something investors work hard to find in an entrepreneur, because they invest large amounts of financial resources on a person they met in a short period of time (Osnabrugge & Robinson 2000, p125). According to a study conducted by Stedler and Peters; entrepreneur's capability to convince the business angel to invest is very important and showed that 81% of business angels has expressed that a positive first impression established in the first meeting as important (Stedler and Peters, 2000).

When it comes to angel investment decisions being made, business angels need to ensure that the entrepreneur should be a proficient manager (Gerald and Joel, 2000).

Loyalty, leadership, reliability and personality are important characteristics that angel investors look into when they evaluate entrepreneurs. An entrepreneur should be able to have those qualities to gain an influence of the investor (Aernoudt 1999 & Sappa 2006). The characteristics that separate a good ownership from a poor is, that if the entrepreneur is able to establish trust and leadership skills with confidence and make the employees follow him/her (Micah Baldwin 2007).

Investors find it comforting to know that the entrepreneurs have invested partly on the business before seeking external investment. This gives the investor the idea that the entrepreneur has given all the effort in the involvement of the process and that the financial value of the business is appreciated (Osnabrugge & Robinson 2000, p127).

According to (Sappa 2006), business angels take lots of time and effort into finding out background information on the entrepreneur to ensure that the owner has the right expertise to manage the business he proposes. (Haines and Riding 1998) corroborates furthermore by adding that the entrepreneur sharing his/her previous business experiences and being much more practical about the business brings more information and confidence to the investor.

Finally all the above characteristics that were discussed are very important for a new start-up entrepreneur to influence investments from professional business angels.

Business Angels

As we have gone through the theories of business angels it is important to know who business angels are in the minds of researchers. A business angel is a highly prosperous individual who can be a business person and willing to invest part of his/hers finance on a promising entrepreneur who has a potential to succeed (Isakssin 2000, Helle 2004).

According to (Harrison & Manson, 1999), there are three eras of business angel researches conducted in the investment business:

First era of business angel research was conducted by United States of America in early 1980s. Authors like; (Landstrom, 1993) from Sweden and (Harrison & Manson, 1992) from United Kingdom repeated the same work by giving out similar results. In this era it was solely concentrated on business angels' thoughts, activities and characteristics (Freear, Sohl & Wetzel, 2002).

Second era enabled researchers to go deep into business angels by investigating their post investment involvements. Theory building up and applying for business angels began in this era. Although there were theories built for business angels, it wasn't developed enough to be completely suitable for the activities of angel investors (Connolly et al., 2006).

Third era will be the era about the future researches of business angels. There were many faults in the previous researches done and they need to be taken in a new direction to make sure the researches investigated will produce good results (Arenius & Minniti, 2005). This would finally make us understand the minds of business angels and match the Business angel – Entrepreneur relationship under changing economy, culture & competition (Connolly, O'Gorman & Bogue, 2006). By the help of (Harrison & Mason) & Swedish researchers like (Sorheim 2005) will enable to investigate on the changing environment of Business angels. This also mean that the theories being found in the previous eras could finally be developed enough to apply on the business angels' current investment methods and get positive results (Gompers & Lerner, 2007).

Characteristics Of Business Angels

Almost all the business angels who actively invest on new businesses have few common characteristics. They all have the main motive to increase the potential of their financial capital (Duxbary, Haines & Riding 1996). But (Landstrom 1993, Osnabrugge and Robinson 2000) explained that all business angels should not be profiled in a similar way because cultures and person to person could make them different to each others ways in terms of making a personal investment decision.

Although there could be many differences between business angels, (Osnabrugge and Robinson, 2000) also stated that there are general motives behind all business angels when it comes to a certain result they expect out of an investment. When Venture capitalists and business angels are taken together it is wide clear that Business angels are individuals who prefer to invest less financial capital than of the formal investors who invest large amounts. Business angels also prefer to invest their money mainly on initial stages of a business (Osnabrugge and Robinson 2000). When it comes to formal investors, they are selective in industries they invest on depending on a lot of information and research. But the Business angels invest on the entrepreneur regardless of what industry sector the business idea would succeed on. They do little research on the industry but heavy research on the entrepreneur they expect to build a trust worthy relationship, because they depend on the entrepreneur much more than the venture capitalists that only rely on the market and the performance of the company (Osnabrugge and Robinson 2000, p63). Furthermore a research conducted in the Norwegian angel market and studies conducted in the US have identified several angel categories.

There could be cultural and economical differences among countries like (UK, Sweden & Singapore) but angel investors do have likely investment standards in those countries (Landstrom 1993). (Freeny, Haines & Riding 1998) explained that the markets which business angels are currently active are where they are wiling to invest more on.

There could be many differences in Business angels' personalities and points of views of the whole investment process. There are studies that showed the “most regular business angel”. It is stated that the age, where successful individuals decide to invest their money on a business is when they get to their 50s. This shows that it is almost a retirement phase from a business point of view. This can be confirmed by a research carried out in Germany where it stated that 95% of BAs were male individuals, 56% were directors or owners of their businesses and 17% were individuals who were in the director board on other organizations (Stedler & Peters, 2003). Even (Osnabrugge and Robinson 2000, p156) supported Stedler and Peters by explaining that the individuals were in director posts and had good business experiences before they decide to move on into personal investments.

Most business angels involve themselves heavily during the initial stages of start-up businesses. They wish to invest near to their homes to make sure of convenience. And Business angels are well educated, wealthy beyond a certain average and expect to have a good life with their feet up on a desk holding a glass of wine, which we all hope to achieve one fine day (Freeny, Haines & Riding 1998).

Although this thesis aims to look at the characteristics of UK business angels, it was clear by all previous studies that there are common statistics about their decisions and behaviors. This tells us that, UK angel investors too are not far from what was described before in the theories. Still it is important to point out few common characteristics of UK business angels;

Common Characteristics Of UK Business Angels

According to (Ardichvili et al., 2002), Business angels in the UK have been or still are active business owners. They invest in more similar markets to what they are operating in, which saves them a lot of time trying to understand the market and the operations.

Like all business angels, UK investors are highly motivated by the return of their investments and the effort (non financial motives) they have put in to the start-up business. They do enjoy being a part of a new business hoping to succeed for the better part of the community and the country (Landstrom 1993).

Furthermore UK business angels prefers and makes sure they invest on new businesses that they could visit regularly, which means they invest in promising firms which will locate geographically near to where they reside (Ardichvili et al., 2002). BAs would rather invest in firms within their residing area, than investing in a location where they find it hard to meet the entrepreneur even though it would double their investments (Harrison, Mason & Robson, 2003). Most British angels prefer their entrepreneurs operate within 100 miles of their homes although investors who invested on technological businesses are willing to travel long distances (www.bbaa.org.uk).

According to Mason, British angels mostly prefer to invest on small businesses during its initial stages where it is not too late to put in not just their finance sources but their advice and experience to get things on the right track. This, in a way gives them satisfaction of being a part of a promising business (Mason, 2002).

After going through the common characteristics of British Angel Investors, it is quite clear that there isn't a major difference compared with the international countries like Sweden and Denmark which will be discussed later. We discussed about Business angels and it is vital to know the categories of their investments.

Investment Aspects Of A Business Angel

One of the objectives of this thesis is to find out how Business angels in UK and other similar countries decide to invest on a certain investment they find it promising. An investor looking for good reasons to decide on an investment is known as Investment Aspects or Investment Criteria (Landstrom, 1993). It is a way of evaluating the business and the entrepreneur to ensure the security and the profitability of the business proposal.

According to the venture capitalism and angel investment comparison carried out by (Osnabrugge & Robinson 2000), it revealed that although there were similarities among their attributes in their investment standards there were a certain amount of dissimilarities which makes business angels favorites for a new start up business.

For an example, venture capitalists are prepared to invest almost in all stages of a business and therefore they look into all the past and probable financial records of the company. On the other hand the business angels much prefer to invest on a start-up phase of a new business where past financial experiences are not so important to them

(Osnabrugge & Robinson 2000).

Most business angels give similar priorities to investment aspects, when it comes to making a decision. With much researches conducted over the past years (Osnabrugge & Robinson 2000) has come up with a selected summary that illustrates the criteria of an investment. The following (Table 1) of twenty-five selective factors are prioritized by well known angel investors;

Priority order

Priority factors for an investment


passion of the industrialist


Dependability of the industrialist


Sales prospective of the product


proficiency of the industrialist


Entrepreneur(s) first impression


Development prospective of the market


Quality of the product


Benefits of the investment for the investor


Niche market


Entrepreneur(s) background


Expected rate of return


Informal competitive security of the product


Investor's non-financial contribution


Investor's ability to fill gaps in the business


High boundaries of the business


Low expenses


The contest in the industry


Possibility for break even without added funding


Required amount of funding


Overall competitive security of the product


Cost to analysis the market


Local venture


Prospective exit method


Investor's understanding of the business & industry

Business Angel Networks

In investment businesses, it is quite common to understand that most entrepreneurs find it hard to reach a potential business angel. It is hard for the entrepreneurs to identify business angels as they keep a very low profile from the public. This problem is solved when business angel networks were introduced to reduce the information gap between investors and investees (San Jose et al 2005).

Usually angel networks have its own information websites where entrepreneurs and investors could meet online and get to know each other and communicate informally (Aernoudt, 1999). Through this process a strong link of communication could be developed where the investors and investees could have a comfortable transaction as they already know each other (Osnabrugge and Robinson 2000, p80). Osnabrugge and Robinson also found that the most essential way for an entrepreneur and a business angel to find each other is contacting a BA Network. Therefore influence of an angel network is very important when it comes to getting a BA to invest on a business.

Exit plan

Exit plan or cash out route is an investment aspect that favors the business angel the most. When there is a negotiation taken place between an entrepreneur and an investor, there usually is an agreement as to when the investor could leave the investment taking the cash out (Stedler & Peters, 2002). When a business angels shows a lot of interest on the exit plan of an investment it shows that there is a need for the entrepreneur to plan out a future exit plan in their business plan (Freeny, Haines & Riding 1998).

(Mason and Harrison, 2002) conducted a Hypothesis test to analyze the exit rate of investors. The results were gauged in groups of IRR achieved in each exit point

IRR – Internal Rate of Return (Measurement of the Return of capital invested)

Business Plan

A business plan can give an investor an idea of where the entrepreneur could be in terms of managing & planning the business (Osnabrugge and Robinson 2000, p133). The business plan is a vital aspect when it comes to investing and finding out how the future

of the business and the return of the investment could look like. (Gerald & Joel, 2000) stated that investors who invest without consulting a business plan end up having poor results.

A business plan should consist of all important financial information, market, growth potential, competitor analysis, possible threats and recommended solutions. Most of the British business angels request for a business plan to calculate the risk they are willing to share with the entrepreneurs (Mason & Harrison, 1996). Therefore it is important for an entrepreneur to come up with a true & promising business plan that can influence the business angel to invest on the firm. To see a standard structure of a business plan, refer (see Appendix 2).

Next we will discuss about the investment standards of other countries and find out how different or similar they are to UK's business angels.

Investment Standards Of Other Countries

As it was discussed earlier, business angels have similar characteristics in most of the countries but it differs a little when economy, culture, policies comes to play. It is quite interesting to understand how other business angels in other countries operate according to their situations because it could give good insights to how they responds to different issues. The example countries which are chosen to discuss next represent each from Asia, Europe & Oceania.


All though there were many researches carried out about investment in the past years in countries like UK, US, there were not many researches done in the Asian countries especially in East Asian countries like Singapore. Although there was one simple study conducted by (Hindle and Lee, 2000) that includes investigations of around 20 individual business angels, it was sufficient to achieve a general conclusion (Ho Yuen Ping 2003). Despite of few researches carried out about the Singapore angel market, Global Entrepreneurship Monitor - (GEM) took initiative and conducted a random survey over more than 2 years (2000-2002), among 2000 individual entrepreneurs.

Therefore the following information was analyzed through one study conducted by

(Wong Poh Kam & Ho Yuen Ping, 2003) of NUS Entrepreneurship center.

Characteristics Of Singapore Angel Investors

Typical angel investors are around the age of 35 or below and are mostly male individuals. The educational standard and the annual earnings of these individuals are much similar to those of other successful western countries. But it is believed that Singaporeans do not expect to have high earnings to invest on micro-angel investments. There are high proportions of angel investors who are still working in their industries and are economically active. Therefore compared to other countries, Singapore's most business angels are not retired but still actively run their own business (Wong Poh Kam & Ho Yuen Ping, 2003).

Standards Of Investments

Compared to the rest of the world, Singaporeans pay less interest on investing their money on manufacturing businesses showing a very low percentage of just 5%. On the other hand they favor investing heavily on businesses that run retail shops, restaurants and small hotels. Business angels show an interesting characteristic by not choosing to invest on entrepreneurs who have or waiting to start-up their businesses with their families. This is quite a selective factor when it is compared with universal angels who have no restrictions in investing on family businesses. They are also reluctant to have business relationships with their colleagues, which is completely opposite to the international standard. (Wong Poh Kam & Ho Yuen Ping, 2003)

Singaporeans strongly focus on building a very strong relationship with the entrepreneur they deal with and compared to international business angels, they restrain from investing on entrepreneurs they are not familiar with. In terms of the values of the funding they make, Singaporeans generally invest between 2500GBP and 50000GBP. And just like the global business angels, Singapore's male gender invest much more than females with high risks. (Wong Poh Kam & Ho Yuen Ping, 2003)


Studying business angels are difficult in almost every country due to many barriers. And it is because most business angels are mysterious individuals who wish not to be publicly recognized due to their personal reasons. Taking note of that, Danish studies of business angels are restricted and it has been quite difficult to find surveys with large amount of data to compare. Therefore the following information is derived from a successful completed study conducted by the Danish Investment Fund. The DIF has had the opportunity to influence Danish Business Angel Network (DBAN) to reach several Danish business angels to participate in this survey. The authors of this research are Rolf Kjergaard (Head of Economic Research), Glenda Napier (Business Angel Consultant), Jacob Nordstrom Borup (Analyst). The research was conducted in 2002.

DIF - A financial organization that contributes to the development of Danish business and trade.

Characteristics Of Danish Business Angels

According to 2001 records (Rolf, Jacob, & Glenda, 2002) has found that Danish angel investors have moved into joining with other co-investors in partnerships to invest on new start-up businesses. Danish investors prefer to join co-investors much more than the UK business angels but not as much as the amount of investors in the US. Less than 10% of investors among the Danish investors prefer to invest alone which is very unique to this market (Rolf, Jacob, & Glenda, 2002). The Danish business angels and entrepreneurs have poor methods of reaching each other due to lack of information sources.

A general characteristic of Danish angel investors are that they are successful entrepreneurs who own a series of businesses and have strong industrial knowledge &

experience under their expertise. They also prefer investing more on unlisted businesses with both financial and non financial contributions, which gives hope for new entrepreneurs with good business concepts.

Standards Of Investments

Danish investors have unique motives behind their investments. They enjoy being business angels and invest mostly for non financial reasons like as a means of enjoying the pleasure of investing their money on other businesses (Rolf, Jacob, & Glenda, 2002). Some others urges for the self contentment of being engaged in other companies' director boards. They do expect high profits coming out of the business too.

In terms of investment sectors, Danish angel investors invest their money on almost all the industries in the market which is a good development opportunity for the economy balance of the country (Rolf, Jacob, & Glenda, 2002). Compared to other international angel investors who are more selective in investment phases, Danish investors invest in all the main phases of a business including (Seed, start-up, expansion, restructuring, and business transfers) but prefer more on the start-up phase (Rolf, Jacob, & Glenda 2002).

New Zealand

The following survey was conducted by the Government of New Zealand. The research was carried out by Infometrics Ltd to the ministry of economic development. Therefore the information and data that will be discussed are highly recommended and valid.

Characteristics Of New Zealand Business Angels

It is understood that New Zealand business angels are much similar to the general understanding we have gained about angel investors in this thesis. The angel investors are generally aged between 35 & 55 and prefer to invest in businesses not far from their residences.

They further intend to invest on industries they are familiar with and experienced. New Zealand Business angels generally are risky and are willing to invest on entrepreneurs they have not known before but still wish to build a business relationship and expect high returns of investments.

A unique finding of this research is that most of the business angels in New Zealand have shared their experience as entrepreneurs them selves once and most of them had the financial support of business angels to get to where they are (Infometrics Ltd, 2007).

Standards Of Investments

Most business angels in New Zealand intend to invest mostly during the start-up and in the early expansion phases of the business. According to the authors of this research, they stated that although the comments were as such, but in practice the favorite phase of the business is the start-up.

Business angels heavily concentrate on the entrepreneurs' managing skills, commitment for the business and the personality. Noting the previous comment it is common to understand that it's the confidence and the reliability the angel investors strongly look for.

They also expect the product or the business idea to be highly competitive to gain a niche market advantage. A unique characteristic of New Zealand business angels are that most investors expect to motivate the entrepreneur to promote the product to the international market more than having the product/service pushed into the local market and ensure development (Infometrics Ltd, 2007).


This chapter discussed the theoretical view of the SME industry, UK Business angels and Entrepreneurs which satisfies the first objective of the thesis. Then it was followed by discussing about the investment aspects of a business angel when it comes to making an investment decisions which was the second objective. Furthermore according to the third objective we discussed the characteristics of UK business angels and Business angels in (Singapore, Denmark & New Zealand).

Many authors have defined UK investors to have similar characteristics when compared to the common understandings we have come about business angels.

Research Methodology

Start Up

A methodology is an important part of a research investigation (Saunder et al, 2007) needed for primary research that is undertaken to answer the specific task set for this project. The literature review explains the academic theories of investors & investee relationships and it discusses about business angels and entrepreneurs in the SME. The research methodology helps in understanding the research carried out and answers questions how and why the research was carried out proving with valid, accurate and genuine results. A research is undertaken to understand a problem and could adapt secondary and primary research. This chapter contains the aims and objectives of the research, research method, research design, data collection method, data analyze method and sampling consideration.

The Aims And Objectives Of The Research

The main aim of the research is to widen the understanding of the business angel and the entrepreneur in terms of attracting each other. It also investigates the aspects of business angels investing in SME (Small & Medium Enterprise) in the UK industry and business angels investing in different countries. This research will try find out its objectives.

The research objectives are:

  • Understand a business angel, an entrepreneur and their relationship in a SME start-up businesses in UK
  • Identify detailed requirements of business angels when it comes to an investment
  • Determine how different countries & cultures undertake investments

Research Method

Quantitative methods have been used in this current research. Qualitative research involves the use of qualitative data, such as interviews, documents, and participant observation data, to understand and explain social phenomena. The qualitative method offered an appropriate method because the nature of exploring investor and entrepreneurial behaviors is not suited to predictive statistical methods (Gartner & Birley, 2002; Leedy & Ormrod, 2001). Although methods can produce statistical predictions of social phenomena, the value of a qualitative study is its ability to generate detailed insight into a specific process from the perspective of the participants in a real life context (Gall et al., 2007). The relatively small size of the business angel group, the dynamics of the risky entrepreneurial start-up environment and the unknown interactions among angel group principals are consistent with a focused and detailed exploration of these phenomena (Yin, 2003).

Orlikowski and Baroudi (1991), following Chua (1986), suggest three categories, based on the underlying research epistemology: positivist, interpretive and critical.

Positivist Research

Positivists generally assume that reality is objectively given and can be described by measurable properties which are independent of the observer (researcher) and his or her instruments. Positivist studies generally attempt to test theory, in an attempt to increase the predictive understanding of phenomena (Orlikowski & Baroudi, 1991).

Interpretive Research

Interpretive researchers start out with the assumption that access to reality (given or socially constructed) is only through social constructions such as language, consciousness and shared meanings. The philosophical base of interpretive research is hermeneutics and phenomenology (Boland, 1985). Interpretive studies generally attempt to understand phenomena through the meanings that people assign to them (Walsham 1993, p. 4-5). Interpretive research does not predefine dependent and independent variables, but focuses on the full complexity of human sense making as the situation emerges (Kaplan and Maxwell, 1994).

Critical Research

Critical researchers assume that social reality is historically constituted and that it is produced and reproduced by people (Lee, 1997). Although people can consciously act to change their social and economic circumstances, critical researchers recognize that their ability to do so is constrained by various forms of social, cultural and political domination (Klein, 1994). The main task of critical research is seen as being one of social critique, whereby the restrictive and alienating conditions of the status quo are brought to light. Critical research focuses on the oppositions, conflicts and contradictions in contemporary society, and seeks to be emancipatory i.e. it should help to eliminate the causes of alienation and domination (Klein, 1994) .

This research follows the approach of interpretive. This interpretive approach was consistent with exploratory qualitative methods in organizational studies given the dynamic nature of social interactions in business angel and entrepreneurial organizations (Gartner & Birley, 2002; Hindle, 2002). With interpretive approaches, researchers can immerse themselves into the study situation and interact directly with participants in their natural environment (Leedy & Ormrod, 2001).

Deductive Or Inductive Approach

Based on the literature review and the objectives of this research, this research will follow inductive approach. Deductive methods relying on quantitative data, the information patterns, theories, and trends that emerge from qualitative exploration provide opportunities for a deeper understanding of the subject (Leedy & Ormrod, 2001). Whereas Inductive approach focuses ‘interpretive method' based on observed or elicited views from respondents (Creswell, 2003). This involves observed and empirical data (Saunders et al, 2007) drawn from open questions where respondents can answer them according to their experiences, upbringing, social class, etc.

Current methodological research differentiates between deductive and inductive approaches in organizational behaviour research (Hindle, 2002). In approaching entrepreneurial management studies, Hindle stated,

Positivism is the set of approaches defining social science as an organized method for combining deductive logic with precise empirical observations of individual behaviour in order to discover and confirm a set of probabilistic causal laws that can be used to predict general patterns of human activity. The interpretive approach embraces the systematic analysis of socially meaningful action through the direct detailed observation of people in natural settings in order to arrive at understandings and interpretations of how people create and maintain their social worlds. (p. 581)

Research Design

Research design is the way in which the research is done based on the research aims and objectives. The designs generally adopted are exploratory, descriptive or casual (Leedy & Ormrod, 2001).

Exploratory Design

This research design is used when absolutely nothing on the problem area is known to get background information (Gall et al., 2007). Exploratory design is a research design in which the major emphasis is on gaining ideas and insights. According to (Gall et al., 2007) this design is used in research cases where the problem needs to be defined precisely, relevant courses of action needs to be identified, and obtain insights before conclusions. Here the information will be loosely defined based on research questions rather than hypothesis or measurements. This can have qualitative and quantitative approach (Gall et al., 2007)

Descriptive Design

According to (Creswell, 2003) descriptive design is a research design in which the major emphasis is on determining the frequency with which something occurs. For example, how often users access the Internet in a given month.. This research follows descriptive design as the design features pre-planned and structured research view the information obtained is clear, useful and cost effective (Creswell, 2003).

Casual Design

“Casual design is used to obtain evidence of cause and effect relationships”, (Gartner & Birley, 2002). The research is done based on assumptions of casual relationship. The casual design is also a planned and structured. The factors considered may not be justifiable and the validity in this design is examined through formal research (Gartner & Birley, 2002). Therefore this design is used to draw predictive measures based on calculated assumptions that could predict results. For example, this design is used for assumptive research like analyzing the prices in share market.

For this research qualitative exploratory method is used. A qualitative exploratory method, in contrast to quantitative statistical methods, enables a real life, open-ended, exploratory process to capture and interpret the conceptual themes that might be relevant to the research problem (Leedy & Ormrod, 2001; Yin, 2003). Analyzing behaviour in real business contexts, the exploratory study method offered a more effective approach for studying the current, dynamic working investment environment selected for the study (Yin, 2003).

Sampling consideration

Qualitative sampling allows for in-depth sampling of small groups to understand

behavioral phenomena. In contrast, statistical sampling methods require large numbers of participants to ensure statistical significance (Miles & Huberman, 1994).

Because of the confidentiality most of the business angels do not want to disclose their identity. So it is really hard to conduct lots of interviews. That is why sample size of this study was so small. The participant sample for this study was 3 business angels and 1 entrepreneur. The participant sample participated in semi structured interviews and demographic surveys.

Data Collection Method

In order to achieve the aims and objectives of this research, primary and secondary data were used.

Primary Data

“The search for answer for our research questions, or the tests of our hypothesis to determine whether or not they are supported by the information we collect, may require us to go beyond the examination of existing data.” (Stevens et al, 2001) For this reason we need to have a primary data. Primary data is the data gathered for specific research objectives that is undertaken to obtain results for the research. There are many ways to conduct primary research, for example, questionnaires ,interviews, telephone surveys, email research, smart card research, of which questionnaires is the most used technique. This helps the researchers to understand respondent's opinions and observations that in turn give data for analysis and serve the objectives for the research (Saunder et al., 2007).

In this research, interviews were used as the source of primary data to find the investment aspects of a business angel and how an entrepreneur should respond to it. 3 business angels and 1 entrepreneur were interviewed. Appendix 3 contains the profiles and interview that was conducted with business angels and entrepreneur.

Secondary Data

Secondary data are data that are already collected and can be used for analysis based on the objectives of the research (Saunder et al., 2007). This includes qualitative and quantitative data and can be descriptive or exploratory. Secondary data can be obtained from document based data, survey based data and multiple sources.

Secondary data from document based data includes information from journals, articles, newspaper, magazines and general referrals. Secondary data from Survey based are data obtained through questionnaires, email research, smart cards. Multi source data are obtained from documentary and survey data (Saunders et al., 2007).

In order to achieve the objectives of this research, secondary data obtained from multiple sources, program like Dragon's Den – BBC and statistical data were used. Appendix 4 contains the profile of Dragon's Den investors and their golden rule for the entrepreneurs.

Data Analysis

There were 3 key objectives of this thesis. In literature review we discussed the theoretical view of the SME industry, UK Business angels and Entrepreneurs which satisfies the first objective of the thesis. Then it was followed by discussing about the investment aspects of a business angel when it comes to making an investment decisions which was the second objective. Furthermore according to the third objective we discussed the characteristics of UK business angels and Business angels in (Singapore, Denmark & New Zealand). Now the practical side of them will be analyzed with questionnaires & evident reports directed at angel investors and entrepreneurs. These evidences will then be analyzed and reviewed with the theory we discussed to find out how far they link each other.


The qualitative methodology was appropriate because the nature of exploring investor and entrepreneurial behaviors and organizational dynamics does not suit predictive statistical methods (Leedy & Ormrod, 2001). The exploratory design offered several advantages over quantitative methods because the sample was small, the purpose was to understand the why and how of behaviors, and interviews and direct observations provided flexibility of a deep exploration into behaviors and interactions (Leedy & Ormrod, 2001; Yin, 2003).

In the next chapter we will discuss about the evidence we have gathered of the academic concepts. And then follow it by evaluating them with the theories and academic understandings we have discussed.


In Chapter 3 it was described that how the data and evidences were collected. In this chapter the evidences will be analyzed and reviewed with the theory to find out how far they link each other. This section starts with the overview of data on demographics then proceeds to the evaluation of Business angels and Entrepreneur interviews and Dragon's Den BBC-2 investors, find the growth of SME in UK and Business angel-entrepreneur relationship in a SME start-up business, Investment in different countries & culture compare to UK and development measurements.

Demographic Characteristics

The first few questions were designed to get information on the general characteristics of each participant like gender, age, educational level, professional expertise and angel investing experience.

Here, the diversity of professional expertise is illustrated. Among the participants financial services providers were represented in 25%, people from software and food related business and real estate were also represented in 25%. Expert from each profession were chosen in the interest of the questionnaires.

The experience level of the participants was also included in this research. This figure indicates that 50% had 5-10 years of angel investment experience, 25% had 11-15 years, and 25% had 16-19 years of angel investment experience.

Evaluation Of Business Angel & Entrepreneur Interviews:

3 Business angels and 1 entrepreneur were interviewed (one to one) for the requirements of the objectives. Appendix 3 contains profiles of the business angels and entrepreneur and also the full draft of one to one interviews.

Evaluation Of Business Angel Interviews (Q 1):

Question 1 was “How should a successful business angel be like?” The participants stated that a business angel should have good amounts of money and they need to have good knowledge of investment and experience. Business Angle 1 stated that “The business angle should be able to analyze the business instantly by looking at the proposal.” In business, trust is important thing. It is vital to build trust among the investor and entrepreneur. Business angel 1 clarified that “Having trust among each other to work on the business is very important.” While Business angel 3 said, “I'll not hesitate to reject the business proposal if I'm a bit unclear about entrepreneur.” It is not always about investing money as resource, there should be non-financial investments involved in the business. Business angel 1 who had personal involvements in his investments contributed all his experience and knowledge about the food industry to the investment. As Business angel 2 was once entrepreneur himself and knows how important to provide contributions to get the business go on. There is a need for an investor to find out exit plan options he can have after the investment. Business angel 3 suggested that there should he good exit plan when the time is right economically and he expects the entrepreneur to come up with an exit route in the business.

Evaluation Of Q 2:

Question 2 was “What do you expect from an entrepreneur?” Business angel 2&3 strongly believes the entrepreneur to be highly skilled. Most business angels request a business plan to find out financial information, market, growth potential, competitor analysis, possible threats and recommended solutions. Business angel 2 said, “I expect a heavily researched and detailed business plan from the entrepreneur.” Whereas Business angel 1 stated, “Entrepreneur Should be good at what he does and be pretty convincing about his service/product.”

Evaluation Of Q 3:

Question 3 was “How would you reach an entrepreneur?” (Osnabrugge and Robinson 2000, p-80) stating the importance of having Business angel networks to get to know each other. Business angel 3 saying that “An angel network finds him beneficial to find co-investors in certain investments he wasn't able to invest alone.” But Business angel 1 mostly use personal contacts, mostly entrepreneur comes to him through a friend or a business contact.

Evaluation Of Q 4:

Question 4 was “If you want to invest how your involvement will be?” (Business angel 1) who uses investments on his personal contacts wouldn't stop just from the initial stage. He would go on investing on all of the stages (expansion, restructuring & etc) if necessary which is a quite unusual characteristic for a UK angel. Although it is pretty common to know that investors in UK are willing to invest in family businesses, (Business angel 3) is not keen on investing on a family involved business which is a common characteristic among the Singaporean investors (Global Entrepreneurship Monitoring survey, 2002). These attitudes prove that all business angels should not be profiled in a similar way. This opinion is backed up by (Landst

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