Business angels, social networks, and radical innovation

Abstract

Innovation is critical for firm and national competitiveness. However, financing innovation is increasingly difficult for early-stage, high-risk projects, as banks and venture capital firms are focusing on later-stage, less risky projects. To fill this gap, US and European entrepreneurs are turning for seed funding to Business Angels (BAs) and Business Angel Networks (BANs). We describe the role of BAs and BANs in the US and Europe from the perspectives of entrepreneurship theory and social network theory. We show how BANs can strengthen ties between entrepreneurs and individual investors under highly uncertain conditions. We also study the links between formal and informal private equity finance, raising wider questions about the funding and performance of clusters of innovation. Finally, we suggest that differences in network characteristics, rather than the availability of projects, explain the large differences in the size and performance of the BA sectors in the US and Europe.