business angels and value added: what do we know and where do we go?

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Business angels and value added: whatdo we know and where do we go?Diamanto Politis aa School of Economics and Management, Lund University , SwedenPublished online: 15 Apr 2008.

To cite this article: Diamanto Politis (2008) Business angels and value added: what do we knowand where do we go?, Venture Capital: An International Journal of Entrepreneurial Finance, 10:2,127-147, DOI: 10.1080/13691060801946147

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Business angels and value added: what do we know and

where do we go?

Diamanto Politis*

School of Economics and Management, Lund University, Sweden

(Accepted 1 September 2007)

Business angels have been highlighted as important stakeholders for potential high-growth ventures. Extant empirical research provides evidence that they not onlycontribute with money but also bring added value to the ventures in which they haveinvested. However, despite the reported benefits of the value added provided by theseinvestors there are very few studies that try to conceptualize this important issue. Thepresent study seeks to meet this shortcoming by presenting a review of literature andresearch on business angels and value added. The overall objective is to recognize therange of value added activities that business angels have been reported to perform,aggregate the findings into a set of distinct but complementary value adding roles, andthen link these roles to theoretical perspectives that explain why they have the potentialto contribute to added value. Four different value added roles performed by informalinvestors are presented together with an explanation of how they can be seen ascomplementary to each other. The following discussion is then used to guide futurestudies of business angels and value added towards areas where our knowledge is stilllimited.

Keywords: business angels; value added; informal venture capital

Introduction

Business angels are individuals who offer risk capital to unlisted firms in which they haveno family-related connections.1 Today it is widely acknowledged that business angels playa vital role in the development and growth of new ventures, in terms of both the financialcapital they invest as well as offering their business skills and personal networks they haveacquired throughout their professional lives (Mason 2006; Kelly 2007). However, despitethe widespread recognition that business angels generally contribute with value added inaddition to their financial investments there is very little detailed investigation of the kindof value added they provide to support the continued development and growth of theirportfolio firms (Lumme, Mason, and Suomi 1998). There are indeed some empirical dataon these issues (e.g. Ehrlich et al. 1994; Mason and Harrison 1996), but the existing resultsare scattered throughout a broad number of studies and the theoretical underpinnings ofwhat business angels do and how they add value are still relatively weak. Based on thisobservation, the overall objective of this article is to recognize the range of value addedactivities that business angels have been reported to perform, aggregate the findings into a

*Email: [email protected]

Venture Capital

Vol. 10, No. 2, April 2008, 127–147

ISSN 1369-1066 print/ISSN 1464-5343 online

� 2008 Taylor & Francis

DOI: 10.1080/13691060801946147

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set of distinct but complementary value adding roles, and then to link these roles totheoretical perspectives that explain why they have the potential to contribute with addedvalue. This objective is met through a review of literature and research on business angelsand value added.

The rest of the paper proceeds in five sections. The next section presents an overview ofliterature and research on business angels and value added. Thereafter follows a sectionwith a description of how relevant papers on the subject were identified. Then an overviewof research that has reported on the value added services of business angels is provided.Four distinct value adding roles are identified based on this overview and the roles arelinked to theoretical perspectives. The discussion continues by presenting some suggestionsfor future research on business angels and value added. The paper ends with a concludingsummary.

Value added contributions by business angels: what do we know?

The scholarly attention to business angels has increased rapidly in recent years and we cantoday find studies from a wide range of countries, including the US (Wetzel 1981, 1983;Harr, Starr, and MacMillan 1988; Aram 1989; Freear, Sohl, and Wetzel 1997), Canada(Duxbury, Haines, and Riding 1996), the UK (Mason, Harrison, and Chaloner 1991;Mason and Harrison 1994; Mason and Harrison 1996; Van Osnabrugge 1998; Kelly 2000;Paul, Whittam, and Johnston 2003), Germany (Stedler and Peters 2003), Japan (Tashiro1999; Kutsuna and Harada 2004), Singapore (Hindle and Lee 2002), Australia (Hindle andWenban 1999), and the Nordic countries (Landstrom 1992, 1993, 1995, 1998; Suomi andLumme 1994; Reitan and Sørheim 2000; Sørheim and Landstrom 2001). Compared withthe very earliest studies in the field (i.e. Wetzel 1981, 1983), the accumulated knowledge onbusiness angels over the past two decades has generated a fairly robust description of theactors in the business angel market (Mason 2006). In particular, research has revealed thatthe typical business angel is a middle aged male who invests a relatively large amount ofhis personal wealth, most often in young and technology-oriented firms (Mason, Harrison,and Chaloner 1991; Duxbury, Haines, and Riding 1996; Hindle and Wenban 1999;Tashiro 1999; Reitan and Sørheim 2000; Hindle and Lee 2002; Stedler and Peters 2003).The working relationship between the business angel and the entrepreneur can in mostcases be characterized as fairly active. The most common form of business angelinvolvement seems to be by way of working on the board of directors and by providingconsultancy services to the firm when required (Mason, Harrison, and Chaloner 1991;Landstrom 1993; Mason and Harrison 1996; Freear, Sohl, and Wetzel 1997; Tashiro 1999;Hindle and Lee 2002). Extant research has also pointed out that business angels tend towork closely with their portfolio firms as a means of both promoting and protecting theirinterests. Even if business angels are a very heterogeneous population (e.g. Stevenson andCoveney 1996) there seem to be some defensible generalities among many of them.

One of the general assumptions about business angels is that they are expected to bevalue adding investors who, in addition to the supply of financial capital, also support thedevelopment of new ventures by means of their professional and personal knowledge andskills.2 This largely stems from the enterprise background that most business angels have,which often includes entrepreneurial and management experience (Aernoudt 1999; Politisand Landstrom 2002; De Clerq et al. 2006). Several studies have pointed out that businessangels have a genuine entrepreneurial career background, in which they often have madetheir fortunes through a cash-out of their own previous ventures. In the early US study ofbusiness angels conducted by Wetzel (1981) he reported that 78% had previous start-up

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experience. In a later US study, Gaston (1989) reported that more than 83% of thesurveyed business angels had previous start-up experience. This pattern can also be foundin studies outside the US. In a UK study by Mason, Harrison, and Chaloner (1991) theyfound that 67% of the surveyed business angels had previous start-up experience. Tashiro(1999) examined business angels in Japan and found that about 60% had experience fromfounding their own business. In another study of business angels in Singapore, Hindle andLee (2002) found that 72% had experience from managing their own businesses. Brettel(2003) report a similar figure in his study of German business angels where 75% of theinvestors had previously started up their own companies. He also noted that about two-thirds of them have been involved in starting up two or more companies. However, themost impressive results in terms of prior entrepreneurial experience come from studies inthe Nordic countries. In a Swedish study Landstrom (1993) reported that as many as 96%of the business angels had previous start-up experience, while Suomi and Lumme (1994) ina study from Finland reported a similar figure of 95%. Furthermore, in a study ofNorwegian business angels, Reitan and Sørheim (2000) stated that even if ‘only’ 46% ofthe surveyed business angels had prior start-up experience most of them had managementexperience from new ventures or in relation to company ownership.

It seems that a consistent pattern across a wide range of different countries andcontexts is that the larger majority of business angels seem to have acquired the kind ofexperience it takes to start, manage and harvest a successful entrepreneurial venture (VanOsnabrugge 1998; Wright, Westhead, and Sohl 1998; Aernoudt 1999). Hence, judgingfrom these prior studies it seems reasonable to assume that the business angels’ priorcareer background has prepared them to conduct the due diligence necessary to evaluatethe merits and risks of prospective informal investments, and to add value in the venturesin which they invest based on their experientially acquired business know-how (Politis andLandstrom 2002). In particular business angels can be expected to contribute with a widerange of value adding services, such as commercial skills, entrepreneurial experience,business know-how and contacts (Lumme, Mason, and Suomi 1998; De Clerq et al. 2006;Mason 2006). Moreover, this contribution is facilitated through a variety of hands-onroles ranging from board membership to less structured consulting activities andformalized part-time employments (Landstrom 1993; Mason and Harrison 1996).

However, a more systematic account of what value added roles business angels actuallyperform is yet to be developed. Empirical reports on the issue are scattered across variouscontexts with different levels of detail, and the theoretical underpinnings of the valueadded contributions provided by business angels are not very clear. In order to meet thisshortcoming in the literature, this paper will review scholarly publications on businessangels and value added to identify the range of value adding activities that business angelshave been reported to perform. The aim is to aggregate the findings into a set of distinctbut complementary value adding roles performed by business angels and to link theidentified roles to theoretical perspectives that explain why they have the potential tocontribute with added value.

Method: tracking papers on business angels and value added

A systematic search was undertaken to identify studies that have addressed the valueadded contributions of business angels. The inclusion criterion was that the study shouldbe a published empirical study reporting on value added performed by business angels inthe post-investment phase. Studies met the exclusion criteria if they did not give anydetailed account of the value added hands-on contributions performed by business angels,

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such as studies comparing performance differences between companies with and withoutbusiness angel financing (e.g. Mason and Harrison 2002; Chahine, Filatotchev, andWright 2007).

With regard to search strategy, the following databases were searched for potentialstudies on the subject: ABI/Inform, BLDS (British Library for Development Studies),Business Insights, EBSCO, EconLit (SCA), Emerald Insight, JSTOR, and Source OECD.Keywords used in the electronic database search included combinations of the followingwords: business angel, informal investor, informal venture capital, value added,contribution, post-investment phase. A secondary search of the bibliographies of thestudies identified was then also undertaken to check for papers that could be relevant toinclude in the sample.

Titles and abstracts of identified studies that were identified by the database andsecondary searches were examined for possible relevance with respect to the inclusioncriteria. In this phase I tried to minimize subjectivity leading to biased selection in twoways. First, I included studies by strict adherence to the inclusion and exclusion criteriadescribed above. Second, a colleague did an independent evaluation of the articlesidentified in the literature searches. Our results were then compared to check for andminimize potential biases. The outcome of this process identified 14 empirical studiesreporting on value adding activities performed by business angels in the post-investmentphase. The identified studies will be presented below.

Value added contributions provided by business angels

The literature review has identified 14 empirical studies published between 1992 and 2005that explicitly have addressed the issue of business angels and value added. In a UK studyof 36 informal venture capital-backed new ventures, Harrison and Mason (1992) identifymany types of support given by business angels to their investee companies. Acting assounding board was their most valuable hands-on contribution and many entrepreneursfound their involvement in the development of marketing plans, business strategies andproducts to be highly rewarding. In several cases they also were involved in therecruitment of the management team. Similar results were reported by Ehrlich et al. (1994)in a study of 47 US entrepreneurs which have received venture capital from businessangels. They found that the most important areas of value added were interfacing with theinvestor group, monitoring financial performance, serving as a sounding board, andformulating business strategy. In another US study, Freear, Sohl, and Wetzel (1995)report the findings from a study of 124 firms that have raised one or more rounds ofventure capital from business angels. This study emphasizes the more interpersonalcontributions from business angels, noting that they add value mainly throughestablishing a productive and trustful working relationship with the management teamin the venture they finance.

Reporting from a survey of 31 business angels and 28 owner-managers in the UK,Mason and Harrison (1996) found that the main contribution of business angels was theprovision of strategic advice. Other important contributions in the study includednetworking (especially with customers), finance and accounting, and general management.The surveyed investors believed their single most important contribution was their generalbusiness experience. However, there was no consensus about which contribution wasperceived as the most important by the entrepreneurs. Specific contributions that werementioned included providing help in diverse areas such as accounting, project planning,marketing, and financial control. In addition, there were some interpersonal contributions

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reported such as ‘lifting the spirits’, ‘sharing the burden’ and ‘providing a broader view’(Mason and Harrison 1996, 117). In another study, Stevenson and Coveney (1996) reportfindings from a study of 484 business angels in the UK. They find that investors perceivethe provision of advice and hands-on involvement to be their main value addedcontribution. Lumme, Mason, and Suomi (1998) report from a study of 59 business angelsin Finland. They identify no fewer than 22 different types of value adding contributionsprovided by business angels to their investee businesses. The 22 different types ofcontributions were sorted under five main themes: strategic management and control,assistance in operational management and control systems, networking, industryknowledge, and resourcing new dynamic business structures. Among other things, theresult indicates that Finnish business angels make an extremely wide range of differentcontributions.

Tashiro (1999) in his study of 20 Japanese business angels noted that they oftenprovided business advice to the businesses in which they invested. This support wasusually in the area of management, but some also provided more specific advice regardingtechnology, human resources or finance. In a study of 27 serial business angels in the US,Ardichvili et al. (2002) report that the investors provide a wide range of non-financialresources to their portfolio firms. These activities include shaping the business concept orbusiness model of the new venture, finding and recruiting the management team and keypersonnel, finding additional sources of capital and helping to establish social networks. Inaddition, the investors were highly involved in the governance of the new firm. Paul,Whittam, and Johnston (2003) surveyed business angels in Scotland. Among their 140usable responses they found that the main non-financial value added benefits wereprovision of business contacts, enhancing the management skills in the new venture, andhelping with raising additional funds. Sætre (2003) in a study of 20 Norwegian businessangels reports that these investors provided access to industry insights which greatlyaugmented the firms’ ability to make strategic choices, and that the access to their high-level industry networks facilitated the enactment of these strategies. Some investors alsomade demands for information and reports concerning the development of the business tokeep up with the day-to-day running of the business. Brettel (2003) in a study of 40German business angels reports that the most important contributions made by theseinvestors were the use of their personal networks, their involvement in coaching theentrepreneur and their provision of financial know-how. Other contributions includedtheir provision of marketing know-how, management experience and their knowledge ofthe industry, helping with strategy development, and searching for and choosing executivepersonnel.

Amatucci and Sohl (2004) made an in-depth study of four women entrepreneurs in theUS who obtained business angel financing. In their study they report that the businessangels served as mentors and were also deeply involved in both strategic and operationalactivities. In another in-depth study of four business angels in Norway by Sørheim (2005)he recognized the value added contribution of business angels reported in the literature butalso demonstrated that experienced business angels may play a value adding key role asfacilitators for further finance. This ability was primarily and strongly affected by theirprevious track record as developers of entrepreneurial firms. This link to further finance isevident also in Madill, Haines, and Riding (2005) who in a study of Canadian technology-based firms who had received investments from business angels report that these investorshelped the firms to become ‘investment ready’ for future rounds of investment fromventure capital firms. This was realized through active involvement in value addedactivities such as providing networking opportunities, hands-on assistance (legal advice,

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accountancy advice, and provision of resources) and business and marketing intelligence.This active involvement by business angels gave credibility to the firms in which they hadinvested and increased their attractiveness to institutional venture capitalists.

The empirical reports reviewed above show a wide range of different value addedactivities provided by business angels. These studies undoubtedly have great merit inshowing the value added potential of business angels. However, without the accumulationof knowledge around a concentrated set of distinct value adding roles on a fairlyaggregated level there may be a risk that continued research on this topic leads to agrowing fragmentation rather than a growing consensus in the field. Instead, focusing onsimilarities rather than on pluralism and contextual differences may be a better startingpoint for an enhanced scholarly understanding of business angels and value added. Tofollow this suggestion, the empirical reports have been summarized in Table 1, togetherwith an attempt to categorize them at a more aggregated level.

The right column of Table 1 has identified a limited set of distinct but complementaryvalue adding roles that business angels have been reported to perform. These roles are:

. sounding board/strategic role;

. supervision and monitoring role;

. resource acquisition role; and

. mentoring role.

Each of these value added roles will be defined and discussed with the attempt to link themto theoretical perspectives that explain why these roles have the potential to contributewith added value.

Sounding board/strategic role

The most frequent value added role performed by business angels reported in previousstudies is acting as a sounding board where the investor provides strategic advice to theentrepreneur based on his or her extensive business know-how and management expertise(Harrison and Mason 1992; Ehrlich et al. 1994; Mason and Harrison 1996; Stevenson andCoveney 1996; Lumme,Mason, and Suomi 1998; Tashiro 1999; Brettel 2003; Paul, Whittam,and Johnston 2003; Amatucci and Sohl 2004; Madill, Haines, and Riding 2005). From thestudies that have been reviewed it seems that business angels are likely to be active in thissounding board/strategic role in a number ways, such as helping to formulate businessstrategy, reflecting on ideas, enhancing the general pool of available management resourcesin the firm, and giving advice on the manner and timing for how to realize the value that iscreated in the firm. Interestingly, their prior business experience and management know-howseems to provide an important basis for adding value in the ventures in which they invest(Wetzel 1994; Mason and Harrison 1996; Politis and Landstrom 2002). Their involvementcan be related to the infusion of entrepreneurial drive and entrepreneurial values in theorganization based on their extensive experience of working in or in relation to new orgrowing ventures (Mason and Harrison 1996). Indeed, business angels often seem to possessunique personal capabilities that have been developed throughout their careers, which inturn gives them opportunities to combine a wide set of diverse competencies to generateideas and creativity for the realization of entrepreneurial ventures (Van Osnabrugge 1998;Wright, Westhead, and Sohl 1998; Politis and Landstrom 2002).

Theoretically, the provision of business know-how and management expertise can belinked to resource-based arguments, where a firm’s internal environment – in terms of its

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Table 1. Prior studies of business angels and value added.

Study Reported value added benefits Value added role(s)

Harrison and Mason(1992)

. Serving as a sounding board(evaluation of product-market activities,development of marketingplans, original businessstrategies and products)

. Sounding board/strategicrole

. Recruitment ofmanagement team

. Resource acquisition role

Ehrlich et al. (1994) . Interfacing with investorgroup


. Monitoring financialperformance

. Supervision and monitoringrole

. Serving as a soundingboard


. Formulating businessstrategy


Freear, Sohl, and Wetzel(1995)

. Establishing workingrelationship withentrepreneur

. Mentoring role

Mason and Harrison . Strategic advice . Sounding board/strategic role(1996) . Advice and counsel (in

marketing, finance andaccounting, and generalmanagement)


. Networking activities . Resource acquisition role

. ‘Lifting the spirits’, ‘sharingthe burden’ and ‘providinga broader view’

. Mentoring role

Stevenson and Coveney(1996)

. Serving as sounding board . Sounding board/strategic role

. Hands-on involvement . UnclassifiableLumme, Mason, andSuomi (1998)a

. Strategic management andcontrol

. Assistance in operationalmanagement and controlsystems

. Networking

. Industry knowledge

. Resourcing new dynamicbusiness structures

. Supervision and monitoringrole þ sounding board/strategic role

. Supervision and monitoringrole þ sounding board/strategic role


. Sounding board/strategic role

. Sounding board/strategic role

Tashiro (1999) . Business advice (generalmanagement, but alsohuman resources,technology and finance)


Ardichvili et al. (2002) . Shaping the businessconcept or business modelof the new venture


. Finding and recruiting themanagement team and keypersonnel


(continued)

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resources and capabilities – is critical for creating sustainable competitive advantage(Prahalad and Hamel 1990; Barney 1991; Teece, Pisano, and Shuen 1997). A main tenet inthis perspective is that a firm’s bundle of resources is critical to build competitiveadvantage and achieve above average returns. However, long-term competitive advantage

Table 1. (Continued).

Study Reported value added benefits Value added role(s)

. Finding additional sourcesof capital and helping toestablish social networks


. Involvement in venturegovernance


Paul, Whittam, andJohnston (2003)

. Business contacts . Resource acquisition role

. Enhancing managementskills


. Raising additional funds . Resource acquisition role

Brettel (2003) . Use of their personalnetworks


. Coaching the entrepreneur . Mentoring role

. Provision of know-how(financial, marketing),management experienceand their knowledge of theindustry


. Helping with strategydevelopment


. Searching for and choosingexecutive personnel


. Access to industry insights . Sounding board/strategic role

Sætre (2003) . Access to high-levelindustry networks


. Demanding informationand reports concerning thedevelopment of thebusiness


. Serving as mentors . Mentoring role

Amatucci and Sohl(2004)

. Involvement in bothstrategic and operationalactivities


. Facilitating access tofurther finance


Sørheim (2005) . Networking opportunities . Resource acquisition role

Madill, Haines, andRiding (2005)

. Hands-on assistance (legaladvice, accountancy advice,and provision of resources)and business and marketingintelligence skills, knowledgeand experience


Note: aLumme, Mason, and Suomi (1998) present a detailed list of 22 specific contributions categorized under fivemain themes (which are presented in the Table). Some of the specific contributions can be linked to different valueadding roles and in these cases they are both presented in the ‘Value added role’ box.

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requires that resources should be heterogeneous in nature and not perfectly mobile(Barney 1991). Smaller firms are also generally characterized by a lack of internalresources, and there is often a lack of knowledge in critical management areas such asfinance and marketing (Shepherd, Douglas, and Shanley 2000; Brush, Green, and Hart,2001). The business know-how and management expertise provided by experiencedbusiness angels may in this respect be considered as a key strategic resource for the firmthat is neither perfectly imitable nor easily substitutable, and therefore of great value.Hence, from the perspective of resource-based theory the personal business know-how andexpertise provided by business angels can be seen as a potential source of competitiveadvantage that can improve a firm’s competitive position.

Supervision and monitoring role

Another value adding role commonly performed by business angels that has been reportedin the literature is their involvement in supervision and monitoring activities (Ehrlich et al.1994; Lumme, Mason, and Suomi 1998; Sætre 2003). This supervision and monitoring roleis about shielding the investments of the main resource providers of the enterprise (equityholders, as well as debt holders and employees) from potential managerial misbehaviour(e.g. the risk that the entrepreneur may mix personal and business goals) (Markman,Balkin, and Schjoedt 2001; Van Osnabrugge 2000). A common way to performsupervision and monitoring activities in venture capital-backed ventures is by institutingproper accounting information systems (Mitchell, Reid, and Terry 1997) and by serving onthe board of directors in the portfolio firms (Gabrielsson and Huse 2002). These checksand balances enable business angel investors to oversee operating matters, protect theassets of the firm, and hold managers accountable for their actions in order to ensure thefuture survival and success of the enterprise.

Business angels’ involvement in the supervision and monitoring role can be linked backto agency theoretical arguments. According to Jensen and Meckling (1976), the separationof ownership (residual risk bearing) from day-to-day decision making creates a principal–agent relationship and induces agency problems between contractual parties. Reducedmanagerial ownership means that outside investors (as residual bearers) risk bearing thecosts of decisions that do not maximize their own wealth. Markman, Balkin, and Schjoedt(2001), for example, argue that managers may have access to superior informationregarding the resources and performance of the enterprise. Consequently, managers cantake advantage of this information asymmetry, consciously or unconsciously, for theirown purposes while reducing the returns of other investors. Business angels thus haveincentives to monitor managerial and firm performance to avoid non-profit maximizingactivities. To reduce potential agency costs and maximize shareholder value agency theoryprescribes that outside investors should be actively involved in supervision and monitoringactivities (Jensen and Meckling 1976; Van Osnabrugge 2000). In sum, based on agencytheoretic reasoning business angels can be expected to provide added value through theirinvolvement in a kind of supervision and monitoring role as these activities help tominimize potential asymmetric information and reduce agency costs.

Resource acquisition role

The majority of business angels seem to be heavily involved in contributing added value byacquiring timely resources through their personal networks (Harrison and Mason 1992;Ehrlich et al. 1994; Mason and Harrison 1996; Lumme, Mason, and Suomi 1998;

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Ardichvili et al. 2002; Brettel 2003; Paul, Whittam, and Johnston 2003; Sætre 2003;Amatucci and Sohl 2004; Sørheim 2005). This value adding resource acquisition role can berelated to activities such as interfacing with investor groups, providing important businesscontacts and raising additional funds. The networking activities of business angels can beseen as helpful supporting the early development and growth of new and small firms, forexample in developing and managing their network of connections with importantstakeholders in the surroundings (Sørheim 2003). Among other things, this makes theventure better prepared for acting on unexpected opportunities that arise in the marketplaceas they have the necessary information and knowledge about when to act in order to takeadvantage of the ‘strategic windows’ that appear (e.g. Harvey and Evans 1995).

The resource acquisition role performed by business angels can be linked to theresource dependency perspective, which emphasizes that the long-term survival andsuccess of a firm is dependent on its abilities to link with its external environment (Pfefferand Salancik 1978). To reduce resource dependencies the theory argues that firms shouldinitiate and maintain control over critical relationships, assets and contacts in the externalenvironment of the firm. These arguments fit nicely into the context of new and smallventures as one of the main obstacles facing small firms in their early phases ofdevelopment is their lack of stable links to important key stakeholders in theirsurroundings (Stinchombe 1965; Aldrich and Zimmer 1986). To overcome the internallack of resources it is important to rely on the assistance of outside expertise to aid thegrowth and development of new and small firms (Deakins, O’Neill, and Mileham 2000).The personal networks provided by business angels may in this respect bring legitimacy tofledgling ventures as well as helping entrepreneurs to get access to critical resources (Steierand Greenwood 2000; Ardichvili et al. 2002). Based on resource dependency theoreticreasoning, the value added contribution of business angels can therefore be regarded as anetwork-embedded capability.

Mentoring role

The final value adding role is the involvement of business angels in mentoring activities,which refers to a developmental relationship between the more experienced business angeland the less experienced entrepreneur (Freear, Sohl, and Wetzel 1995; Mason andHarrison 1996; Sætre 2003; Brettel 2003). This role is about being a helpful, open andtrustful partner with the aim to build up a stable and committed working relationship withthe entrepreneur. Reported activities that can be related to the mentoring role includeproviding moral support, lifting the spirits, sharing the burden, providing a broader view,and discussing and dealing with sensitive personal issues. The involvement in thesementoring activities can support important business operations, such as joint planning andproblem solving based on social and relational means, and they also foster solidarity andtrust. Trust can in this respect lead to improved performance as it economizes ontransactions costs, as well as generating greater commitment and promoting collectivelearning (Child and Rodrigues 2003). The mentoring role can thus be considered as highlyimportant for the development of a well-functioning and trusting relationship betweenbusiness angels and entrepreneurs (Wetzel 1994; Harrison, Dibbon, and Mason 1997).

Interestingly, the mentoring role performed by business angels seems to be very muchfacilitated by their own entrepreneurial experience as well as the perception of themselvesas entrepreneurs rather than as financiers. For example, several studies have revealed thatbusiness angels often have the same personal characteristics and motives (e.g. need forachievement, locus of control, independence, intrinsic motivation, etc.) as entrepreneurs in

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general (Sullivan 1991; Duxbury, Haines, and Riding 1996). In addition, they often have agenuine background as entrepreneurs (Sullivan 1991; Landstrom 1993; Duxbury, Haines,and Riding 1996; Van Osnabrugge 1998; Aernoudt 1999). Previous studies have evenshown that business angels generally still consider themselves as entrepreneurs rather thanex-entrepreneurs in their subsequent careers as business angels (Sullivan 1991; Aernoudt1999). Based on these findings, it seems appropriate to regard business angels as ‘co-entrepreneurs’ rather than purely financiers of entrepreneurial ventures (Sætre 2003;Lindsay 2004). The similarity between entrepreneurs and business angels in terms ofpersonality and way of thinking might in this respect also strengthen the likelihood thatthe entrepreneur accepts being guided by the business angel.

Theoretically, the mentoring role performed by business angels can be related totheories of relational governance (MacNeil 1980; Huse 1993; Grandori 2006). While agencytheorists mainly emphasize formally defined contracts to safeguard equity investments,relational governance theorists argue for the importance of norm-driven definitions ofproper behaviour to regulate social relationships and social exchange between economicactors (Huse 1993). A basic tenet in the relational governance perspective is that anyexchange relies heavily on social components, and that repeated cycles of exchange overtime will create a psychological identity between contracting parties characterized byshared norms, values and beliefs (e.g. Fergusson et al. (2005); also see similar arguments inCable and Shane (1997)). An ongoing functional relationship based on these premises willgenerally foster trust and enable parties to build confidence in each other and adopt moreflexible models of partner cooperation (Shepherd and Zacharakis 2001). When there is arisk of conflicting interests in a partnership then relational governance mechanisms becomea necessary and efficient complement to formal contracting mechanisms as they fostercontinuance, reciprocity and bilateralism (Macneil 1978). Thus, in a relational governanceperspective business angels contribute with value added through the mentoring role byinstituting a shared vision, mutual understanding and trust in the relationship between thebusiness angel and the entrepreneur, which in turn has the potential to reduce harmfulconflict and promote cohesion and long-term commitment.

Table 2 presents a summary of the four value adding roles together with links totheoretical perspectives that explain how business angels may add value to theirinvestee firms.

Table 2. Theoretical perspectives on how business angels add value.

Value adding roleHow do business angels addvalue? Theoretical underpinning

Sounding board/strategicrole

Building and protecting thebundle of valuable resources inthe firm

Resource based theory

Supervision and monitoringrole

Minimizing conflicts ofinterests by means of formalcontrol mechanisms

Agency theory

Resource acquisition role Creating and maintaining astable flow of criticalresources

Resource dependency theory

Mentoring role Minimizing conflicts of interestsby means of informal controlmechanisms

Theories of relationalgovernance

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Summary: a sorting logic of business angels and value added

Based on this attempt to categorize different kinds of value added roles on an aggregatedlevel (Table 2), it seems reasonable to argue that business angels provide severalcomplementary value added benefits to their portfolio firms. At a closer investigation, itseems possible to further differentiate the four value added roles along two majordimensions. First, they differ in their emphasis on value added based on eitherconstructing a competitive resource base in the firm (Brush, Green, and Hart 2001) orgoverning the working relationship between the business angel and the entrepreneur(Cable and Shane 1997). This distinction is related to the two systems of any business: theproduction system and the governance system (Huse and Gabrielsson 2004). Theproduction system is focused on the firm’s management of resources (broadly defined).The main focus is on attracting and maintaining resources and effectively channelling theminto products and/or services, which ultimately leads to the performance of the firm. Thegovernance system, on the other hand, is focused on the relationships and interactions thatallocate rights and responsibilities among the various resource providers of a firm. Amongother things, the system focuses on the design of particular governance mechanisms todetermine how organizational resources will be deployed and how to deal with theresolution of conflicts between organizational actors who have potentially divergent goals(Daily, Dalton, and Cannella 2003). In sum, the value added contributions focused onsecuring the need for resources in the firm is the ‘sounding board/strategic role’ and the‘resource acquisition role’. The value added contributions focused on governing therelationship between the business angel and the entrepreneur are the ‘supervision andmonitoring role’ and the ‘mentoring role’.

The second dimension is whether the value added role is based on the business angels’human capital or social capital, both of which can be seen as the personal assets andqualifications that business angels have developed throughout their professional careers(Politis and Landstrom 2002). Human capital can be defined as the set of productiveknowledge and skills which business angels have acquired through different kinds of jobs,training and experience (Ucbasaran, Wright, and Westhead 2003). Social capital, on theother hand, can be defined as the advantage created by an individual’s location in astructure of relationships (Adler and Kwon 2002). In the context of this study, it can bereferred to as the features of the business angels’ relationship networks that mediate normsand social trust and facilitate coordination and cooperation for mutual benefit (Sørheim2003). In sum, the value added contributions based on business angels’ human capital isthe ability to perform the ‘sounding board/strategic role’ and the ‘supervision andmonitoring role’. The value added contributions based on business angels’ social capital isthe ability to perform the ‘resource acquisition role’ and the interpersonal ‘mentoring role’.The sorting logic described above is summarized in Figure 1.

It is important to emphasize the interrelationship between the different value addingroles. For example, the resource acquisition role and the sounding board/strategic role are,for obvious reasons, complementary in the production system of a firm. The businessangel can use his or her network to secure the supply of external resources that are criticalfor firm operations, as well as using their business know-how as part of the firm’s bundleof unique capabilities to provide the basis for its strategy. Similarly, formal and relationalmechanisms of governance can also be seen as complementary to each other as they bothcontribute to reducing the risk of opportunism between contracting parties (Huse 1993).In order to achieve optimal levels of confidence in partner cooperation the entrepreneurand the business angel need to balance the level of formal monitoring and informal trustbuilding governance mechanisms (Shepherd and Zacharakis 2001).

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The value adding roles are also interrelated as they are based on business angels’accumulated human or social capital. To be able to monitor the performance of thebusiness, the business angel needs to have sufficient business know-how and managementexpertise. The accumulated human capital which business angels have acquired throughdifferent kinds of jobs, training and experience (Politis and Landstrom 2002) isconsequently supporting both the provision of business know-how and managementexpertise through the sounding board/strategic role as well as his or her ability to performthe supervision and monitoring role. In similar vein, to function as a mentor the businessangel needs to have developed a reputation as a trustworthy and competentbusinessperson. The business angels’ accumulated social capital can in this respect serveas an advantage both in matters of resource acquisition (Sørheim 2003) as well as insupporting the development of a trusting developmental mentoring relationship with theentrepreneur (Sætre 2003).

In addition, there are interrelationships across the dimensions. The mentoring role, forexample, can support business angels’ ability to effectively provide business know-how andmanagement expertise and therefore strengthen the sounding board/strategic role.Mentoring is about building a trusting developmental relationship and this in turn mayincrease the likelihood that the entrepreneur will be more receptive to, and actually use,the advice given by business angels. For this reason, it can be expected that entrepreneurswill value the mentorship role, not so much as an informal control mechanism, but fordeveloping trusting relationships where learning can become routinized through repeatedinteraction and shared beliefs over time (Deakins and Freel 1998; Deakins, O’Neill, andMileham 2000). On the other hand, the business angel can be expected to place greatervalue on the mentoring role, as this can reduce transaction costs and foster non-contractual coordination mechanisms between contracting parties (Noteboom 2000).Interestingly, this suggests that the different parties may experience different benefits fromthe same role.

There also seem to be interrelationships between the resource acquisition role and thesupervision and monitoring role. Business angels rely to a large extent on friends andbusiness associates in their social networks to provide them with relevant information fortheir investment activities (Fiet 1995; Sørheim 2003). It may therefore be reasonable toassume that their network can provide them with relevant information about performancecriteria and industry benchmarks that can be used in performance valuations. This, inturn, suggests that the social networks of business angels can play a role not only in

Figure 1. Business angels and value added: a sorting logic.

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resource acquisition but also in information evaluation, which encourages the circulationof information between network members (Chaserant 2003).

In sum, based on the discussion above it seems fair to argue that although the fourvalue adding roles that have been identified can be seen as distinct, they should also beseen as complementary and linked to each other. Therefore, it becomes important to beaware of potential cross fertilizations where the performance of one value adding role mayenhance the effect of another role.

Business angels and value added: where do we go?

The identification of different value adding roles in Figure 1 together with the associateddiscussion provides a conceptual foundation for a better understanding of business angelsand value added. At the same time, the identification of the different value adding rolesprovides a basis for considering where research on these issues may head in the future.First, an important avenue for future research is to develop robust operationalizations ofbusiness angels’ involvement in the different value adding roles. Although considerabletime and energy is required to be invested to develop appropriate measures somesuggestions can be made of how to start this proposed research path.

In order to assess business angels’ involvement in the sounding board/strategic roleresearchers could look at existing operationalizations used in studies of business advicegiven to small firms (e.g. Bennett and Robson 2003; Gooderham et al. 2004). For businessangels’ involvement in the supervision and monitoring role, researchers could be inspiredby measures of control activities used in research on boards and governance in new andsmall firms (e.g. Gabrielsson 2007). In addition to financial controls, such as following upnet income, the return on assets and sales, these measures should also include strategiccontrols relevant for new and small firms, such as product quality checks, customersatisfaction, new patent registrations, success in meeting target dates, etc. Furthermore,business angels’ involvement in the resource acquisition role could be gauged bymeasuring their ability to mobilize resources relevant for firm operations. These activitiescould look at studies which have measured networking activities such as establishingcontact with important parts of the environment, raising capital, influencing importantparts of the environment, recruiting labour, identifying and finding customers, as well asaccessing timely support from business colleagues (e.g. Borch and Huse 1993; Fadahunsi,Smallbone, and Supri 2000). Finally, researchers could draw on studies that adddimensions of interdependence and trust in developing business relationships to assess thementoring role. One suggestion is the measures used by Huse (1993, 1994) which werebased on Macneil’s (1980) theories of relational norms to emphasize that individual actionmust be understood in a social context. To conclude, there are several studies that canserve as sources of inspiration to develop appropriate measures of business angels’involvement in the different value adding roles. This is a fundamental task in order toenable empirical research on business angels and value added to be validated andcompared across different contexts.

Second, perhaps the most crucial and important question in research on businessangels and value added is the effect of their hands-on involvement on the performance ofthe business. Do their value added contributions actually matter, and what kinds of valueadded contribution matter the most? This question will require that business angels’involvement in various roles is linked to firm performance. Unfortunately, it is not exactlyclear what firm performance means when dealing with new and small firms or how to findappropriate operational definitions. In entrepreneurship research it is common to use

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economic measures of firm performance, such as efficiency, growth or profit (Murphy,Trailer, and Hill 1996). However, as shown by Murphy, Trailer, and Hill (1996) an effecton one performance dimension cannot justify that the effect is similar across othermeasures of financial performance. For example, a growth in sales can be achieved at thecost of reduced firm profitability.3 Therefore it is highly unlikely that the use of only onesingle measure of firm performance could sufficiently capture the effect of business angels’hands-on involvement. In addition to this potential pitfall, it can also be difficult toaccurately estimate the performance of new and small firms entirely on the basis ofaccounting measures (Petit and Singer 1985). The reason for this is that these measures canbe highly influenced by regional or industry variations in accountancy practices (e.g.depreciation policies and inventory evaluation principles), and are also subject tomanagerial manipulation due to ‘creative’ tax-avoiding accounting practices. Hence, inaddition to financial measures there may also be a need to include other performancemeasures that are relevant for new and small firms, such as new product success (Khavul2001), marketing and sales effectiveness (Hill 2001), harvest/exit readiness (Higashide andBirley 2002) or firm survival (Manigart, Baeyens, and Van Hyfte 2002). Subjectivemeasures of firm performance and measures that seek to combine personal and economicmeasures of success (Jarvis et al. 2000; Pelham 1997; van Gelderen, Frese, and Thurik2000) could also be considered. In sum, future research on business angels and value addedshould include a wide range of theoretically relevant performance criteria when empiricallytesting for the effect of business angels’ hands-on involvement on the performance of thebusiness. Given the expectations that business angels contribute to the future survival andsuccess of the businesses they invest in this research path should be a number one researchpriority.

Third, the identification of different value adding roles in Figure 1 is fundamentallystatic and does not consider that business angels’ emphasis on performing different rolesmay vary and change depending on various conditions. However, the identification ofdifferent value adding roles highlights this question of how the business angels’ emphasison various roles will change during the development of a venture. For example, it is likelythat there is a ‘honeymoon’ period at the beginning of the relationship (Fichman andLevinthal 1991), characterized by high commitment and individual effort by the businessangel. This period may then turn into a period where the business angel reduces his or herinvolvement and takes a less active hands-on role when the first emotional excitementdrops. However, what may trigger changes in business angels’ involvement, and how thesechanges affect the value added roles performed by the business angel remain unclear. Atbest, future research on this issue will be facilitated by samples of business angels who havemade investments at different time periods. This would allow for the isolation of theirmore immediate post-investment attitudes and activities from their long-term post-investment strategies.

Fourth, it is also important to consider whether the growth of business angel groupswill have any effect on the value added contribution of business angels. Even if soloinvestors dominate the informal venture capital market there is evidence indicating thatmore organized groups of business angel syndicates are developing (Sohl, VanOsnabrugge, and Robinson 2003; Mason 2006). According to Mason (2006, 285), theseangel groups have the potential to create some advantages such as a better deal flow,superior evaluation and due diligence, and a greater likelihood that their subsequentinvolvement will contribute with significant value added. This latter advantage is due tothe greater pool of experience, advice and strategic services that an organized group ofbusiness angels can provide. However, the question of the value adding effect of business

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angel groups is still largely unexplored and unanswered and requires further investigation,involving detailed comparisons between solo investors and business angel groups.

Fifth, inspired by the work of Zahra and George (2002), there may be a need todistinguish between potential value added and realized value added. The underlyingargument for this distinction is that just because business angels (or business angel groups)have the potential to contribute with added value it does not mean that this value can beeffectively implemented and used in a new venture. Potential value added would here referto the set of potential benefits that a new venture can receive from a business angel. Therealized value added will, on the other hand, refer to the successful implementation andincorporation of the hands-on contribution provided by a business angel in the venture’soperations, thereby improving its performance. Previous studies have almost completelyneglected this difference even though this line of reasoning may have importantimplications for the way we should understand the value added contribution of businessangels. Hence, instead of treating value added as a simple transferring process thedistinction suggests that people and organizations can vary significantly in their ability toeffectively implement and utilize the potential value adding benefits that business angelscan provide (Cohen and Levinthal 1990). Making a distinction between potential andrealized value added in future research can thus allow researchers to study why someattempts to contribute added value fail while others thrive, given apparently similarconditions. This avenue of research may call for a contingency approach (Donaldson2001; Robinson and McDougall 2001), which would emphasize that the difference betweenpotential and realized value added may be contingent upon conditions in the internal andexternal environment of the new venture. Examples of influencing factors may be the lifecycle stage of the business (Churchill and Lewis 1983), the career experience and teamtenure of the entrepreneurial team (Barney et al. 1996), or characteristics of the industrywhere the firm operates (Sandberg and Hofer 1987). In sum, how the value addedcontribution of business angels may be influenced by different conditions in the internal orexternal environment of the venture is an issue that is of great relevance to consider. This,in turn, may enhance the scholarly understanding of the process in which their potentialvalue added contributions can become effectively implemented and incorporated in theventures in which they invest.

Many of the research questions addressed above may require different approachesfrom those commonly used in the field so far. Studies of business angels and value addedhave primarily been conducted using postal questionnaires and have been largelydescriptive with very limited theoretical grounding. While large-scale postal questionnairescan be considered appropriate when the focus is on gaining a broad overview knowledgeof the characteristics of the market and its actors, this approach is much less suited fordeveloping theory of the value added activities informal investors perform in the post-investment phase. Future studies of business angels and value added should thereforeconsider making use of more theory-building case studies (Eisenhardt 1989; Yin 2003) tofurther explore the value added benefits of informal investors, before large-scale empiricalinvestigations can be made.

Conclusions

This paper contributes to literature and research on business angels in two importantways. First, it provides a systematic overview of previous literature and research onbusiness angels and value added. Despite considerable interest in the value added activitiesof formal venture capital organizations (e.g. Gorman and Sahlman 1989; MacMillan,

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Kulow, and Kholyian 1989; Sapienza 1992; Busenitz, Fiet, and Moesel 2004) the sameattention has been less evident in studies of informal venture capital. This is unfortunateconsidering the critical importance of the added value performed for both business angelsand entrepreneurs (De Clerq et al. 2006). Second, the paper presents a set of distinct butcomplementary value adding roles that business angels have been reported to performtogether with links to theoretical perspectives that explain why these roles have thepotential to contribute with added value. Up to date, empirical reports have been scatteredthroughout a broad number of studies and the theoretical underpinnings of what businessangels do and how they add value have been relatively weak. There has been a lack oftheory informing the issue of business angels and value added.

The post-investment phase is one of the most under-researched areas in the study ofbusiness angels. This calls for intensified studies and further theory development. Theempirical and theoretical arguments underlying the four different value adding rolesidentified here can provide a stimulus for additional research and debate on the issuewhich might add new perspectives to the existing research agenda on the involvement ofbusiness angels in the post-investment phase. Future research on this important field ofinquiry is consequently highly warranted.

Notes

1. The definition of business angels varies significantly in the literature (Kelly 2007). In this study Ihave used this broad definition in order to be able to capture the phenomenon of value added aswidely as possible. Although this may compromise the rigidity of the findings this choice wasconsidered satisfactory, given the exploratory aim and purpose of the study.

2. Even if it is generally acknowledged that business angels are value adding investors who play avital role for the development of new ventures it is important to point out that not all researchagrees with the generality of this statement. Hence, although it can be assumed the largermajority of business angels have the potential to add value to their portfolio firms through theirhands-on involvement scholars should equally be aware that this ability could differ dependingon their prior management and entrepreneurial experience and the type of involvement thatusually is performed (e.g. Sørheim and Landstrom 2001).

3. Growth in sales generally requires capital investments, which can have a negative impact on firmefficiency/liquidity (Murphy, Trailer, and Hill 1996).

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business angels and value added: what do we know and where do we go?

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