Edited by Benton E. Gup
Chapter 16: The state of research and the economic environment in small-firm finance
McDonald and DeGennaro (2016) and DeGennaro and Dobson (2017) demonstrate, the finance profession has come to very little consensus about small businesses and startup finance in particular. The lack of consensus among financial economists regarding small-firm finance starts with disagreement about definitions. Even fundamental issues, such as the definition of an angel investor, for example, are problematic. Some researchers define angel investors as early-stage investors in a company and the riskiest and earliest equity investors in a company after the entrepreneur himself (Mason and Harrison 2002; Goldfarb et al. 2012). Yet, this is far from the only definition. Other researchers describe angel investors as informal private investors, colorfully described as “friends, family and fools” (Bygrave and Hunt 2007), or wealthy individuals who provide capital for startup companies (Sohl 2003). Still other writers define an angel as a person who provides capital to a private business, owned and operated by someone else who is not a friend or family member (Shane 2009). These differences might seem unimportant from a cursory review, but they have a significant influence on the individuals who are included in the group of angel investors and hence in any study of angel investor practices and investment returns. For instance, the definition of Shane (2009) would have included Warren Buffett’s investment in Goldman Sachs. This is not to say that any particular definition of angel investors is right or wrong, but rather that the lack of consensus makes it difficult to come to any firm conclusions about virtually any area of angel investing.
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