A Personality Profile of Canadian Informal Investors

Firms that require small amounts of equity capital often depend on wealthy individuals who invest their personal funds directly in the small businesses of other individuals. Such people are known as informal investors, or as "business angels," and have been identified as the primary source of equity capital for new firms (Wetzel 1987; Freear and Wetzel 1990; Aram 1989; Mason and Harrison 1994). The size of the active market for informal capital has been estimated to be at least as large as the formal institutional market for venture capital (Wetzel 1983, and others), while the size of the pool of capital that is potentially available for informal investment may be ten to twenty times larger yet (Riding and Short 1987a). This paper outlines findings from a cross-sectional study that seeks to document psychological characteristics of informal investors. These characteristics are compared with those of a control group of non-investors and with norms for the general population. The results may be useful to entrepreneurs, policy-makers, and academics. Entrepreneurs have traditionally been reluctant to sell equity capital in their businesses, especially to institutional venture capitalists, fearing loss of autonomy and control (CLMPC 1995). However, business owners may be less reluctant to share control of the firm with informal investor partners, that is, partners who supply growth capital as well as their experience, their energy, and their contacts. Successful partnerships, however, require that the parties be mutually compatible. It is useful, therefore, for entrepreneurs to understand the character of investors. With this understanding, partnerships can be nurtured, and new investments facilitated. Policy-makers can gain insights into what investors consider to be important so that government initiatives can better focus on the appropriate elements of capital formation. Academics may gain insight from research that attempts to push our understanding of the investment process in a new direction. Previous Research and Motivation for This Work Two streams of literature converge to provide a basis for this work. The first comprises the published literature regarding business angels and the market for informal investment. The second is the literature on psychological traits as they pertain to the entrepreneurial process. These two streams are reviewed briefly. Informal Investment The concept of a "gap" in the market for capital is well-developed in the academic literature and in the popular media. Traditionally, it was thought that this gap was simply a shortage of capital. This simplistic notion, however, is a belief that flies in the face of economic theory that contends that in an operationally-efficient marketplace, rates of return would adjust so that the market for capital clears. In view of this challenge, the explanation for the gap has shifted - it is now attributed to the fragmentation of the marketplace (Wetzel 1983). To the extent that the market is inchoate, it is now operationally efficient; the price of equity capital is established locally and exhibits rigidity. Yet initiatives directed at completing the market have met with mixed success (Mason and Harrison 1995). Thus, neither of these rationales for a gap is completely satisfactory. In part, a gap is experienced because informal investors turn down a high proportion of proposals from entrepreneurs seeking expansion capital. According to DalCin and her colleagues (1993), fewer than three percent of investments proposed to angels led to investment; 97 percent were turned down. An essential part of the investment process is the interaction between investor and entrepreneur. Congruity is vital. The problem may be that entrepreneurs are often reluctant to concede control, yet control is one element of investors' risk-reduction strategy. Perhaps the low investment rates and the sense of a gap both stem from the inability of entrepreneurs to cooperate with informal investors. …