Chapter 14: The Organization of the Informal Venture Capital Market
Jeﬀrey E. Sohl Introduction In spite of the volume of business angel investing, the early stage equity market is fraught with ineﬃciencies. For ﬁrms with established ﬁnancial records and tangible assets, ﬁnancial markets supply an extensive assortment of ﬁnancing instruments. These markets are relatively accessible and the owner is left to decide the optimum mix of a ﬁnancial structure based on the cost of capital (Brophy, 1997). However, the high growth entrepreneurial ﬁrm seeking early stage equity capital is faced with signiﬁcant problems in ﬁnding this risk capital due to the ineﬃciency of the early stage equity market. Thus, the type of early stage ﬁnancing required by high growth entrepreneurial ﬁrms, namely high risk equity capital, is not readily available. While variations in the availability of early stage capital exist across countries, and regionally within countries, overall there is a persistent lack of high risk capital for entrepreneurial ventures (Riding and Short, 1987; Gaston, 1989; Mason and Harrison, 1992; Harrison and Mason, 1993; Landström, 1993; Freear et al., 1994a). Business angels, who collectively comprise the informal venture capital market, are the major supply of early stage equity capital, and improvements in the eﬃciency of this market will increase both the size and the accessibility of early stage equity capital. There are three main reasons for the ineﬃciencies, and thus the lack of early stage capital, in the informal venture capital market. First is the invisibility of business angels, second, the high search costs...
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