The venture capital market consists of two sectors: venture capital funds, mainly, and the informal sector, represented by individual investors.
The informal venture capital market consists of individual investors directly investing their personal financial resources in new and growing small firms. They are called "informal investors" or "business angels" (business angels). Much less is known about this market than about the work of venture capital funds. Sometimes it is impossible to give accurate estimates of its volume in specific figures, since the main source of information about the activities of business angels is sociological research, on the basis of which aggregate statistical indicators cannot be built. Moreover, the results of these studies are only available to a limited extent. Nevertheless, in recent years, materials have appeared summarizing information from numerous sources about the proposals of informal investors. These materials allow us to get an idea of the content and scope of the activities of business angels.
Business angels are middle-aged and older professionals who are highly educated, primarily in business administration or engineering and science. The vast majority of them have experience in business. Some are successful entrepreneurs, others are highly paid business professionals (accountants, consultants, lawyers, etc.) or hold top positions in large companies. There is a high proportion of retired professionals among business angels. At the same time, in recent years there has been a growing number of active businessmen who want to invest their personal funds in new risky firms.
Business angels can be people who provide capital once in a lifetime to help friends start a business, but there are also those who constantly look for opportunities for profitable venture capital investments and often make them.
Business angels invest only a small part of their wealth. Therefore, failure and loss of money when investing does not greatly affect their financial situation. They are wealthy enough not to need the return on their investments in young companies. However, they derive deep satisfaction from the financial success of the venture, seeing that their intuition has not failed them, as well as from personal participation in the management of the new venture. Other important considerations are their interest in a particular technology and their belief that it will have an important social impact. And also the feeling that, having succeeded in business, it is necessary to help the next generation of entrepreneurs get on their feet. However, we emphasize that business angels are not philanthropists. Their main motivation is the prospects for a significant increase in the cost of invested capital.
The average investment is $50,000-100,000, although larger investments are not uncommon. in European countries in the early 1990s. The average business angel investment ranged from EUR 14,000 in the UK to EUR 67,000 in Sweden. And according to the latest data, the average investment in Europe is currently 130 thousand euros. When assessing the volume of investment in the informal venture capital market, the results of the research lead to an unambiguous conclusion that informal venture capital is the largest source of risky financing for new and growing small and medium-sized enterprises. Studies in the UK and Finland show that the informal venture capital industry is at least twice as large in terms of investments in small and medium-sized enterprises as institutional venture funds. Thus, the volume of investments of informal venture capital exceeds the volume of financing from venture funds by two or more times.
Venture capital provided by business angels is commonly called "patient capital" (patient capital): business angels, having provided the company with investments, do not require the payment of interest or dividends during the entire investment period, which averages about 5 years. As for the exits from the company practiced by business angels, unlike venture funds, business angels, as a rule, do not sell their block of shares in the company on the stock exchange, but sell it to the owners of the company themselves within the period agreed with them.