“Pennies from heaven”? Market failure, circuits of capital and policy support for business angels: The case of cross-border angel investment

Richard T. Harrison

Research output: Contribution to journalArticlepeer-review

Abstract

Angel investment is widely associated with economic development through entrepreneurial activities, and has attracted the attention of policy makers internationally, nationally and regionally, resulting in a range of measures to support the development of the market. In this paper we challenge this policy orientation and identify three key flawed assumptions on which it rests: the presence of market failure in the early stage risk capital market, the complementarity of angel and other sources of early stage finance, and the integration between the angel and venture capital circuits of capital. We develop a framework for the identification of market failure as both a supply-side and a demand-side phenomenon, demonstrate that venture capital and angel finance are substitutes not complementary funding sources and draw out the association between angel investment and venture underperformance, and build on the ‘circuits of capital’ literature to identify the increasing structural independence of the VC and angel investment markets which has implications for the link between angel financing and local and regional economic development. These issues are discussed in the context that stimulation of cross-border (international) investments by angel investors has emerged as an important topic of academic analysis and policy debate in Europe, not least on the basis that such investment will support the otherwise constrained growth and scale-up of entrepreneurial ventures. The paper concludes by outlining, in the policy mix concept, a basis for the systemic analysis of the development, implementation and impact of entrepreneurial finance policy.

Original languageEnglish
Article numbere00311
JournalJournal of Business Venturing Insights
Volume17
Early online date8 Mar 2022
DOIs
Publication statusPublished - Jun 2022

Keywords

  • angel finance
  • circuits of capital
  • economic development
  • internationalisation
  • market failure
  • policy mix
  • venture capital

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