Investment Policies and Behavior of Italian Business Angels: an Empirical Analysis

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Introduction 
 
In order to achieve economic growth it is key for companies to able to finance 
themselves in an efficient and effective kind of way. However, often the financial system is 
not able to support companies in an efficient manner. Especially in the case of Italy it is hard 
for start-ups to gather funds due to the fact that entrepreneurs usually seek debt capital, 
which banks are not willing to grant because start-ups in general are not able to achieve 
steady cash flows. The reason why entrepreneurs demand for debt, despite the fact that it is 
not an ideal way of funding a start-up, is because they are often not aware of the different 
sources of capital available (Capizzi and Tirino 2011).  
The initial cash infusion usually operated by the founder of a company is often not 
sufficient to guarantee the survival of the start-up in the initial stages of development. 
Therefore, since bank loans are not appropriate and nonetheless, hard to obtain, start-ups 
need to seek some kind of equity funding. Equity funding is provided by specialized 
institutions which are venture capital funds. Venture capital investments are appropriate for 
early stage ventures as they do not demand for constant cash payments like in the case of 
loans, but instead venture capital funds bear the enterprise risk and receive returns only 
through capital gains at the end of the investment. Anyway venture capital funds usually 
tend not to finance companies before they have reached several years of age (Morrissette 
2007, Harrison and Mason 2000). This is because venture capital funds need to have a well-
defined time horizon in which to achieve returns for their investors and because they prefer 
to invest large sums of money (on average more than € 1 million) (NVCA 2010) in order to 
leverage on the due diligence process and on the management of operations. In other words 
assessing and managing a large company takes about the same time and effort as assessing 
and managing a smaller company, making early stage investments (which need funds 
between € 25,000 and € 500,000) not worthwhile (Hanf 2007). Therefore there appears to be
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a “funding gap” between what start-ups need and what venture capital funds are willing to 
give.  
The actor that is able to fill such a gap is the “Business Angel” (BA). A business 
angel is an individual “acting alone or in a formal or informal syndicate, who invests his 
own money directly in an unquoted business in which there is no family connection and who, 
after making the investment, takes an active involvement in the business, for example, as an 
advisor or member of the board of directors.”(Harrison and Mason, 2008). The goal of a 
business angel is to achieve capital gains after the sale of shares of a company. Business 
angels are often referred to in literature as informal investors, even though recently angels 
have evolved and are able to organize themselves in syndicates making larger deals (about € 
1 million) and investing in companies in different stages (Capizzi and Tirino 2011). 
Research shows that also Italian angels have evolved adopting the best practices seen on the 
most developed markets along with the progressive growth of the Italian informal venture 
capital market. 
This paper has the goal of outlining a descriptive profile of Italian business angels 
trying, to uncover all those features that cannot be assessed through a purely statistical 
analysis but which are still very important in order to fully understand the phenomenon of 
angel investing. Through a series of semi-structured interviews with Italian business angels 
the research will investigate what are the motivations behind their investment decisions, 
what are the barriers they encounter in the investment process, what is their role in the 
companies they finance together with the effectiveness and efficiency of business angel 
networks (BANs). Furthermore the research will analyze specifically the aspect of female 
business angels, investigating why they are so few compared to men and what are the 
differences in their behavior. The sample is composed of 34 interviews and it allowed to 
uncover several interesting trends in the behavior of Italian business angels as well as 
gathering some insight on what could be some policies and measures that could be
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implemented in order to incentive and further stimulate the growth of the informal venture 
capital market in Italy. 
The first chapter of this paper will analyze the informal venture capital market and 
the process of angel investing, highlighting the crucial role it has in an economy as well as 
comparing and contrasting it with venture capital investing. The second chapter will outline 
the relevant literature taken in consideration to structure the analysis. The third chapter will 
contain the empirical analysis exposing in detail the research questions investigated through 
the interviews and uncovering the results. The fourth chapter will examine the main 
measures and policies that have been or will be implemented in Europe and in Italy which 
will serve as comparison with policy suggestions that are advocated by the angels during the 
interviews. The fifth and final chapter will include concluding remarks as well as 
suggestions for further research and policy suggestions.
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1. Business Angels and the Informal Venture Capital 
Market 
 
 
 
The term “Business Angel” was first used to describe wealthy individuals who 
financed, with their own private resources, Broadway shows in the late 1800s. These 
investors took on significant financial risks not just because they expected large returns but 
also because they were also motivated by their love for theatre and therefore enjoyed being 
able to promote actors and screenwriters and spend time with them (Ramadani 2008). 
Several researches show that still today business angels are motivated by more than just 
financial returns (Van Osnabrugge 1998b, Brettel 2002, Ramadani 2008, Morrissette 2007, 
Sullivan and Miller 1996 etc.). Business angels have been recognized as a category only 
very recently (Wetzel 1983) however they have been a key driver of innovation for 
centuries. For example at the mid 15
th
 century Johann Gutenberg had to reach for financing 
from wealthy individuals in order to build his mechanical movable type printing press which 
started the so-called “printing revolution” making books available for the masses for the first 
time in history (Nosengo 2007). Business angels helped Alexander Graham Bell found the 
company Bell Telephone in 1874, financed Henry Ford’s automobile company in 1903 
(Ramadani 2008) and more recently business angels are credited for the early stage 
financing of incredibly successful and innovative companies such as Apple Computer and 
Amazon.com (Van Osnabrugge and Robinson 2000).  
Estimates vary and are clearly hard to perform, however according to Reynolds et al. 
(2004) the amount of capital provided by angels worldwide is eleven times more than the 
amount provided by venture capitalists, amounting to $50 billion received by approximately 
50,000 companies (Morrisette 2007). Their importance for the economy is clear, however
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despite such a crucial role business angels are surprisingly un recognized and unappreciated 
by the press and the public in general (Ibrahim 2008). 
So who are business angels and what is the difference between them and venture 
capitalists? As previously stated business angels are individuals who invest their own money 
directly in unlisted companies and take an active involvement in the business (Harrison and 
Mason, 2008). Business angels represent one of three main sources of financing available 
for start-ups. According to Hamilton (2001) and Brettel et al (2000) the first financial source 
for start-ups is self-funding which includes money from family, friends and fools (FFF) as 
well as well as business angels; at the very early stages self-funding is the main source of 
capital. The second financial source is capital from venture capitalists while the third one is 
bank debt and corporate funding (investments made by corporations). Start-ups in their very 
early stages of life are usually not able to achieve steady cash flows, if any. This makes debt 
an inappropriate financing strategy since it entails constant repayments at a defined schedule 
which startups are not able to afford. Companies at early stages need to seek for some kind 
of equity investment.  
The traditional way of retrieving such equity capital is through specialized 
institutions which are venture capital funds. Venture capitalists manage money pooled from 
third parties in a professionally managed fund (Rose 2006).The Italian Private Equity and 
Venture Capital Association (AIFI 2000) defines venture capital as “the investment activity 
in the form of risk capital performed by professional operators through the acquisition, the 
management and the sale of  shares of unlisted companies”. These kind of investments are 
more risky than loans and therefore have the potential to achieve higher returns (Campbell 
2003). Furthermore venture capitalists often also support the company with contacts and 
management expertise. The average amounts invested by venture capital funds has increased 
from $ 3 million in 1995 to $ 7 million in 2003 (Payne 2005), the trend within the formal