Informal venture capital: a study of the investment process, the post-investment experience and investment performance

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Abstract
Although research on the informal venture capital market has expanded in recent years our current knowledge and understanding remains deficient in a number of respects. This paper examines three aspects of the operation of the informal venture capital market where information is either lacking or based on anecdotal or impressionistic evidence: the investment process, the post-investment experience and the investment performance. Information was obtained via telephone interviews with 31 business angels and with 28 owner-managers. In 20 cases information was available from both the entrepreneur and the investor. The paper concludes that in most cases the informal venture capital process has worked relatively well. There are few situations where the relationship between investor and entrepreneur broke down. Nevertheless, the naivety and inexperience exhibited by a minority of investors and entrepreneurs is striking. However, there are significant and consistent expectation gaps between investors and entrepreneurs in terms of the pricing of larger investments and the performance of the business. Differences of opinion between investors and entrepreneurs concerning what constitutes a favourable perforrnance of the business may be a source of disputes in the future.