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

7 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