Role of Business Angels in the Financing and Developing Young Growth-oriented Small Enterprises

Transcription

1 Doctoral School of the Faculty of Economics and Business Administration University of Szeged Role of Business Angels in the Financing and Developing Young Growth-oriented Small Enterprises Theses of Doctoral Dissertation Author: Andreasz Kosztopulosz Supervisor: Prof. Dr. Katalin Botos Head of Institute and Division Szeged, 2005

2 1. History and aims of the research The concept of business angels and their role in business financing and development gained a wider recognition among the Hungarian audience interested in venture capital after the publication of Péter Osman s book (1998). So far this book has been the only primary material in the field as opposed to the international literature which has not only become plentiful but also immense and diversified in the last couple of years and decades. In the United States the study of business angels and their role in financing and development has a history of almost 25 years; and from the 1990 s on relatively independent research programmes sprung up in a number of other countries as well. Empirical data are getting larger, literature has become abundant and the subject drew the attention of political economists in the United States, Japan and the European Union alike. From the vast amount of information that accumulated, only scraps have been taken over by the academic and professional circles in Hungary. At the same time experts and researchers working in the field of venture capital in Hungary tend to emphasise that business angels whose activities in Hungary have not yet been mapped comprehensively could fill a gap in the area of providing capital and know-how to new, growth-oriented small enterprises. The Faculty of Economics and Business Administration of the University of Szeged intends to fill this gap and to this aim there has been an intensive research going on for several years in the field of informal venture capital. As an equal partner in this research Zsolt Makra also contributed to the success of this research with his constructive work. The basic aim of the paper is to provide a coherent theoretical framework, a systematic structure and a summary of the partly published results of business angel research. The synthesis will yield the additional result of mapping out the basic directions for further research. By focusing on the activities and role of business angels I will basically investigate the issue of whether it would be worth providing support to this unique segment of the venture capital market on the level of economic policy in Hungary. To this end I will try to find answers to questions like the following Why does economic policy consider growth-oriented small enterprises important, while they represent only a small minority of the SME sector and which companies may be the most widely interpreted target group for investment for business angels?

3 What is the theoretical background of the statement that these growth-oriented small enterprises, especially in the early phases of their life cycle, have more difficulties in obtaining financial resources necessary for realising their development objectives? How can the special financing and development role of business angels fit into the theoretical framework? Can we trace the positive role of business angels in relation to aggregate social welfare? Is there a business angel market in Hungary, and if yes, what are its characteristics? What shall be the reasons for and methods of state intervention to develop the informal venture capital market? 2. Methodology of the research The background of the dissertation is provided by the research activity of the last five years, which included exploring and processing the extremely entangled international and Hungarian literature in the field; synthesising and further developing the discovered theoretical and empirical findings; setting up and performing my own empirical research and the analytical presentation of its results. The dissertation therefore summarises the results of a research having a colourful methodological basis and a basically theoretical orientation (except for Chapter five, which is rather empirical and focuses on economic policy). When introducing the theoretical background we relied on secondary sources and aimed to restructure the huge amount of information contained in the literature with the purpose to synthesise. We achieved independent theoretical results by developing and generalising the primary model of Chan (1983) fitting into the theory of financial intermediation. Our investigation of business angels in Hungary started in the spring of 2003 when we submitted a paper for the OTDK (National Conference of Academic Study Circles) competition at the Institute of Finances at the Faculty of Economics of the University of Szeged. The objective of our survey was to obtain basic information about the so far undiscovered market of informal venture capital in Hungary: about investment activities, the behaviour of investors and their main characteristics. The most difficult part of the survey was

4 to compile the sample. We used the snowball method and compiled a list with 28 names on it. After their feedback it turned out that 18 out of the 28 persons were actually dealing with venture capital investments as a private entity. 14 persons were willing to fill in the questionnaire, so the actual rate of return was 78 percent. The initial sample of 14 persons was enlarged by eight persons in due to targeted requests and this way the survey introduced in this dissertation is based on the activities of 22 respondents. The small size of the sample does not allow for substantial statistical analysis, similarly to most first generation surveys conducted abroad. We illustrated the description of the supply side of the business angel market by a case study in which we analysed the financing and development activity of a corporate angel. The background information for the case study was provided by interviews with heads of companies. 3. The structure of the dissertation The discussion part has five chapters. The main focus, i.e. the role of business angels in bridging the capital niche is discussed in Chapter 3 which is physically the centre of the dissertation and is the most important part of it. The theoretical discussion of the topic proceeds along two simultaneous lines: that of the financed entities and that of the financing entities. In Chapter 1 we set out to give an overview of the role and characteristics of growth-oriented small enterprises departing from enterprises and economic policy to give a systemic framework to our accumulated knowledge. In Chapter 2 we approach the issue from the point of view of potential financiers: we explore the difficulties they have to face when obtaining resources necessary for growth and we analyse the theoretical background of these difficulties by using the findings of related literature. In Chapter 3 which is at the core of the dissertation we mainly focus on efficiency related problems of business angel financing having a look at it both from a microeconomic and a macroeconomic angle. First investors interests constitute the points of reference for the analysis. Then we expand our study to include efficiency on the overall level of society by

5 applying a generalisation of a financial model. In the second half of the chapter we discuss the important messages and shortcomings of our model along the lines of theoretical findings. In Chapter 4 we present the results of the first small sample empirical research about the activities of business angels in Hungary and compare the findings to the characteristics of more advanced informal venture capital markets described in the international literature. In Chapter 5 we consider the development options for the Hungarian market on the basis of international practice and experience and we also make a number of proposals based on the results of the research. 4. Research results The research of the informal venture capital market was basically driven by the intention to find out whether it would be profitable to provide support for these special players on the venture capital market on the level of domestic economic policy. In order to answer this question we have to position the subject of business angel financing which is a relatively unknown term for the Hungarian public in the system of enterprise development. We also have to make an attempt to explore the characteristics of the domestic informal venture capital market and we have to think over the options for interaction to develop the market. In the following we summarise the most important findings and statements of the dissertation on the basis of the structure and logic of its chapters. A) The economic importance of growth-oriented small enterprises Why are (or should be) growth-oriented small enterprises, which form only a small minority of the SME sector important for economic policy? Why should they deserve special attention from enterprise developers? The answers to these questions provide the basis for recognising the financing and development role of business angels. At the same time recognising their role gives incentive to look for means of creative intervention to help these

6 enterprises succeed. We based our findings on a wide variety of international and domestic literature. 1. From the beginning of the 1970s substantial changes took place in the structure of economic life and as a result of these changes enterprise (as a form of behaviour) and the activities of small business undertakings came to the forefront. By now it has become widely accepted that small enterprises play an important and complex role in modern economy and society; small and large enterprises are considered to be equally important pillars of economic activity. After summarising the wide-ranging arguments supporting this statement we selected a single very important element which has been one of the primary objectives of economic policy since the Great Depression: that is creating jobs. We examined the role of small enterprises in detail from this aspect. 2. Both international and domestic data we studied confirm that small and medium-sized enterprises play an important role in employment. Instead of large enterprises it is smaller enterprises which are increasingly becoming the main sources of new jobs. However, research results published in the literature unequivocally draw attention to the fact that it is not small enterprises in general but rather a small circle of undertakings, that of rapidly growing enterprises which create the bulk of new jobs. 3. From the above follows the important question of whether it is possible in any way to identify the engines of growth among the extremely heterogeneous mass of small enterprises. We have studied numerous recommended classification methods and examined how researchers in the field tried to create a typology of small enterprises and undertakings from this aspect. Although they have examined rapidly growing enterprises from numerous dimensions to be able to identify them, we can clearly state that it is not really possible to foretell at their start which enterprise will be growing rapidly and which will not. 4. Concerning growth-oriented small enterprises in Hungary our knowledge is quite inadequate due to the fact that so far there have been only a few studies, which explicitly aimed at exploring the special features and economic role of these enterprises. In the light of domestic data we can only assume that there are growing, and, moreover, dynamically growing enterprises among small and medium-sized enterprises operating in Hungary, and the

7 percentage of start-ups with high growth-potential can be considered average compared to the international situation. 5. Growth-oriented small enterprises have a substantial role in employment and economic growth contrary to their seemingly insubstantial numbers and you can more often find among them enterprises that consider innovation as the main source of permanent competitive advantage to secure growth. Based on the review of literature in the field we can conclude that we have a very limited knowledge of them (and it is especially true for growth-oriented small enterprises in Hungary) even though they represent an important target group for economic policy looking for the means to increase the rate of employment and improve competitiveness. It would be worth choosing forms of intervention which can help the growth of these enterprises and which aim to diminish obstacles in the way of their growth. In this respect there is a lot to be done not only in Hungary but also in the EU: the EU is lagging behind the USA in competitiveness partly due to the lower level of entrepreneurial dynamism. B) Difficulties of growth-oriented start-up enterprises in obtaining funds Beyond the lack of motivation there are numerous external obstacles to hinder the growth of enterprises. For example the availability and cost of funds can have a substantial impact on whether small enterprises can realise their growth plans. We processed and synthesised the extremely wide-ranging results of theoretical research in the field to highlight how the presence of information asymmetry and transaction costs lead to encountering financing difficulties for some of the small enterprises in their early stages of growth. We showed how the situation is made explicitly acute by the capital niche developing in venture capital financing. It mainly affects growth-oriented small enterprises especially in their start-up life cycles. Based on the revealed relationships we argued that interventions aiming to improve entrepreneurial dynamism should have the indispensable element of supporting venture capital involvement, which also includes the effort to bridge the capital niche. 1. Based on the results of numerous surveys we can conclude that among the most important factors influencing the starting up and operation of small enterprises we can regularly find the

8 difficulty of obtaining external funds. Moreover, the availability of funds is even more crucial for growth-oriented enterprises. Among growth-oriented small enterprises the ones having just started and making their first steps and the start-ups looking for financiers for their new and innovative business ideas face a highly difficult situation. Research results in Hungary also testify that domestic start-up and growing enterprises still do not have sufficient funds at their disposal. 2. The majority of research investigating the characteristics of funding concerning small enterprises put an emphasis on the existence of imperfections of capital markets when trying to explain the group of widely experienced special features which imply funding difficulties. With the intention to synthesise the wide-ranging theoretical approaches in our analysis we found that the presence of funding difficulties and their special features are rooted in the nature of transaction costs and asymmetric information, and they represent the core of the problem. 3. We examined in detail the driving forces behind the development of funding difficulties and their relationship with the loan market. We pointed out that loan-related problems can become especially acute when the need for external source is high compared to the value of the collateral security offered and information-related problems are serious because they mean that the risk of financing the project is higher than the average. In other words it means that as a reaction to information-related problems financiers apply methods which are increasingly disadvantageous for growth-oriented start-up and innovative enterprises. We also emphasised that loan contracts by their very nature are not really suitable means for involving funds if an enterprise carries a higher-than-average risk. 4. Even though asymmetric information and transaction costs naturally have an impact on the availability of external owner s funds we concluded that the most appropriate form of financing for small enterprises with great growth potential is the involvement of external equity especially in their early stages of development. On the demand side, however, due to their motivation and attitude some of the growth-oriented small enterprises are themselves open towards external financiers mainly if they contribute to the success of the enterprise not only by providing financial resources but also intellectual capital (know-how, experience, relationships).

9 5. Where can small enterprises on the rise find external owner s capital indispensable for their growth? High fixed transaction costs of public listing and the mechanism of underpricing, together with continuous expenditure needs to comply with legal and reporting requirements resulting from being listed on the stock exchange make it uneconomical to involve small amounts of capital. Therefore, the stock exchange is only a theoretical alternative for them. Basically, they have only one option left to acquire external owner s capital: the venture capital market. Although only a tiny fraction of enterprises world-wide are able to receive venture capital funding, for the above mentioned reasons it is a uniquely important possibility for young, innovative growth-oriented enterprises in order to involve capital; venture capital can have an indispensable financing role in their development. Surveys show that by developing the most dynamic enterprises venture capital makes a substantial contribution to economic growth, the growth of employment and innovation. 6. In spite of its outstanding role, the institutional venture capital market is not sufficient for providing a viable financing alternative available for a wide range of new and innovative growth-oriented small enterprises. To designate this insufficiency the literature in the field uses the term equity gap. The equity gap characteristically develops between the upper limit of internal and almost internal sources and the lower limit of institutional venture capital resources and exercises and effect on financing the early stages. We described how certain driving forces on the supply and demand side result in the development of the equity gap. 7. In order to bridge the equity gap on the market of relatively less resource intensive groundbraking and start-up capital investments, state intervention assuming the role of correcting market insufficiencies and informal venture capital may play a role. In the present dissertation we investigate the problem from the latter (and often disregarded) aspect: the aspect of possibilities inherent in informal venture capital. C) The role of business angels in bridging the capital niche There are players on the market who make their investments in the critical range of the financing spectrum: that is, they are willing and successfully able to finance enterprises

10 which are relatively less capital intensive and are in the early stages of development. Their activity is made especially valuable by the fact that for the success of the investment they regularly assume an active developing role: they are not simply investors and this is why the term business angel suits them. By further developing the essential venture capital allocation model of Yuk-Shee Chan (1983) we managed to point at the positive role of business angels in relation to the system of social welfare. We examined in detail the possible ways of sharing tasks and cooperation between business angels and institutional venture capital investors and also the activities and special features of the network of business angels making the operation of informal venture capital market more efficient. 1. We may come upon a number of definitions for informal venture capital and business angels, which contain several identical elements with different emphases put on them. By comparing the definitions based on studying a wide range of literature in the field we came to the conclusion that instead of accepting the general use of the terms as synonyms we accept a probably more fruitful approach saying that business angels can basically be seen as the elite of informal venture capital investors. This way, we provide a wider (more general) and a narrower definition of the term as well. The dissertation focuses primarily on business angels in the narrow sense, however, we also mention corporate investors engaging in production and service activities (not financial mediation, however) who are called corporate angels. 2. We attribute key importance to informal venture capital investments because they bridge the gap between the family and friends resources at hand and institutional venture capital. We traced back this key role of bridging the gap to two features of business angel investments. The first is that business angels are willing and effectively able to finance enterprises which are relatively less resource intensive and are in the early stages of development. Informal venture capital investors fill the gap on the capital market not only due to their special features. They have a defining role and this is the second feature because the informal venture capital market s financing capacity is multiple compared to that of the formal market. In addition, it is an easily reachable resource at hand compared to the institutional venture capital becoming more and more global. 3. In the course of explaining the first feature in detail we started out from our previous observation that in the environment of small enterprises costs deriving from the risk of

11 contraselection and moral risk can be determining and therefore, the successful financing method is the one which is able to cut down these extra costs. Our intention was to prove that business angels and institutional venture capital investors approach information-related problems totally differently, what is reflected in the investment methods they apply. By analysing these differences in the context of the agent theory we also introduced the main features of business angel financing while emphasising that probably the most important economic role of business angels can be captured in their helping and value-creating personal contribution, a unique form of risk management. In the light of available data concerning return it is clear that the investment approach and method applied by business angels is not less efficient in managing risk than the approach followed by institutional investors. All this makes it probable that business angels are able to manage the financing challenges inherent in young growth-oriented small enterprises in an effective way. 4. The aspect of efficiency has always meant the priority of financiers interests. If investors are able to differentiate between good projects and bad ones they can certainly contribute to the more favourable allocation of capital. As a result, the well being of investors investing in good projects increases to the detriment of the well being of investors in bad projects. However, it does not automatically mean an increase in aggregate social welfare. In the present dissertation we intended to answer the question whether business angels can contribute to the more efficient allocation of venture capital from the point of view of social welfare. As a framework of our analysis we used the model of Chan (1983) and we extended and developed it further to be suitable for dealing with the role of business angels. Via our integrated model we proved that the activity of business angels improves the efficiency of allocation on the market because their presence on the market improves the general quality of funded projects in equilibrium. To prove this was one of the most important independent theoretical outcomes of the present paper. 5. We consider the improved model integrating business angels to be successful on account of its three important messages. On the one hand, the model by its own means forecasts the well-known empirical observation that the relationship between business angels and institutional venture capital investors is basically not competitive but much rather complementary. We discuss the possible ways of cooperation and sharing tasks between business angels and institutional venture capital investors in detail. The second message of the model follows from the conclusion that business angels improve efficiency by exploring the

12 level of quality, filtering and forcing higher quality projects. At the same time, however, targeted interventions aimed at young, growth-oriented small enterprises are limited by the almost impossible task of political decision-makers to effectively filter out enterprises that belong to the target group. By selecting and developing enterprises worth of investing business angels can contribute to the successful accomplishment of such a policy. The third important message is in connection with the statement that the lower the costs of selection for business angels the more substantial is the movement to a favourable direction compared to the initial on par allocation. From the above it follows that on the level of society allocation can be made more efficient if the selection costs for business angels can be reduced. A possible institutional form to this end would be to establish a network to share information, the so-called business angel networks to function as a communication channel between business angels and small enterprises in need of capital. In the present dissertation we investigated in detail the characteristics of these important institutions, their types and the experiences about their operation on the basis of international examples. D) Survey of the activity of business angels in Hungary Is there an informal venture capital market in Hungary, are business angels active here? One of the important yields of the research work was publishing and also performing an international comparison of the results of the first (small sample) empirical study about the activity of business angels in Hungary. We drew a picture of the informal venture capital market in Hungary and added colour to it by introducing the activity of a corporate angel in the form of a case study. 1. Within the framework of international GEM research the first survey investigating the importance of informal investments in Hungary was performed in Domestic results show that 2.2 percent of the adult population had an informal investment amounting to HUF one million on average between 1999 and The relatively high percentage is probably due to the favourable definition, which allowed for including family members, relatives and friends of enterprise founders in the circle of investors, and also loans without guarantees. The GEM study of 2004 included 133 informal venture capital investors in its sample in the broad sense of the definition and out of them there were only 2 persons who can be considered

13 business angels according to the narrow definition. This rate of 1.5 percent is considerably lower compared to the international average of 6.9 percent which is a telling sign of the immature state of the Hungarian market. After relating this rate to the population of informal investors amounting to 144,000, we estimated the number of active business angels in Hungary to be approximately 2, We do not have comprehensive and reliable information about the size and characteristics of the market of business angels in the narrow sense and the motivation, preferences, performance and level of activity of investors even today. In Hungary mainly researchers in the field and well-informed entrepreneurs are familiar with this form of investment. This contributes to the fact that informal venture capital investments play a far less substantial role in the development of domestic growth-oriented enterprises than in English-speaking countries (mainly in the United States and the United Kingdom). We tried to explain the immature state of the market by tracing it back to five sets of factors. 3. Business angels taking part in our survey are exclusively middle-aged men (aged 44 on average) and 86 percent of them have a university degree. Most frequently they have degree in economics (fourteen) while degree in engineering (five) is the second most common among them. Considering their place of residence the sample included fifteen investors domiciled at Budapest or Pest County, four investors living in the South Eastern part of the country (South of the Great Hungarian Plain) and two living in the South Western part of the country (Southern Transdanubia). 86 percent of the respondents in the sample are owners of enterprises at present and have experience in running enterprises of 11.6 years on average. It is interesting that four of the identified investors are not Hungarian citizens and three of them have double citizenship. Five of them had previously been living in English-speaking countries where informal venture capital investments are much more common and preferred than in Hungary. Considering their permanent addresses they are all domiciled in Hungary except for one person. Out of the investors making up the sample 16 persons answered questions regarding their state of income and wealth: 80 percent of them is able to earn a net income exceeding HUF 10 million a year and six business angels have a fortune exceeding HUF 100 million. 4. In the past three years the 22 interviewed business angels have invested in altogether 100 enterprises and the number of average investment of 4.55 per person is high even in

14 an international comparison. If we consider those 18 respondents who acquired a stake in 70 out of the 100 enterprises the total value of investments amounted to HUF The average amount of investment was approximately HUF 16 million. 5. The results of the survey show that for business angels in Hungary the financial return of the investment is the most important factor of the investment; without exception all respondents named significant return to be the most important consideration. It is a remarkable outcome, however, that two hedonistic factors ranked second and third preceding two economic factors: professional challenge and pleasure. It is also palpable that altruist factors (social values) have an insignificant role in the investment decision considering the present state of maturity of the informal venture capital market. So we can say that the survey in Hungary also confirmed that acquiring financial gains is not the only motive for business angels. 6. In the survey we examined the sources of information concerning investment opportunities. In this respect it is quite evident that informal, personal information sources are dominant: angels discover enterprises via their business partners and personal acquaintances, while actively searching for such enterprises is another important method. The survey demonstrated that there are no mediating or professional organisations to provide genuine support for the development of informal venture capital market in Hungary and the media is not interested in the topic either. 7. The most important factors to influence the investment decision of business angels in the sample were expected rate and period of return, the growth potential of the enterprise and of the market and the personal merits of the entrepreneur. 8. Our survey showed that business angels in Hungary also assume an active role in order to make the financed enterprise successful. Most frequently they make their relationship capital available to reap the fruits of their personal and business relations built during the years for the sake of the enterprise. The majority of investors take an active position in the management (or the board of directors) and regularly monitor and control the operation of the enterprise. They take a similarly active role in finding new customers and investors, in consulting and selecting the members of the management so these activities can be viewed as general practise in case of informal private investors in Hungary. Taking part in activities

15 in functional areas (human resource management, marketing, research & development) depends on their education and skills; therefore, it is characteristic of only a restricted number of investors. 9. Based on the results we can draw the conclusion that investors prefer enterprises in their early stages of development: there were only two business angels who did not indicate this as a preference. The survey also shows that business angels in Hungary do not refrain from financing technological firms which are considered to have higher risk: more than half of the investors have a stake in innovative enterprises of the new economy percent of responding business angels said that they would not refrain from making a joint investment: two-thirds of the respondents would make a joint investment with other private entities and 40 percent of them with banks, venture capital firms and investment firms. 14 percent of the respondents named state partners as possible joint partners. If we examine the ratio of acquired shares in the enterprise it turns out that business angels in Hungary aim to put their hands on a stake of percent; on the other hand, one-third of the respondents also prefer acquiring a share of 5-25 percent or a majority stake (exceeding 50 percent). Based on the answers, shares lower than 5 percent are quite rare. 11. We have even less information on the financing and development role of domestic corporate angels than on the activities of private entities engaging in venture capital investment. Therefore, we considered the only such example we came upon, which is Videoton Holding Co. worthy of introducing and included the analysis of their investment practices as a case study. In case of Videoton we examined which forms of cooperation could develop between the investor and the financed enterprise, what the investment procedure looks like and along which lines the enterprise was targeted. While describing a successful investment we introduced the possible success factors and ranked them to create a list of five factors. E) Development options of the informal venture capital market What kind of reasons and means can state intervention have to develop the informal venture capital market? Summarising the train of thought in the first four chapters we drew the

16 conclusion that it would be worth developing the informal venture capital market in Hungary and on the basis of studying the international practice we described the possible ways of developing the market along the lines of three aspects (intervention on the demand side and on the supply side and increasing efficiency). As for the possible means we think that handling the problems on the demand side and increasing efficiency of the market are the most important ones. However, considering the present state of maturity of the market it would be important to facilitate the supply side as well. We have also articulated several proposals to develop the domestic market. 1. Calculations and estimations show that informal venture capital assumes a substantial role as a form of external capital investment into small enterprises in developed countries; moreover, an increasing number of people think that a vivid and efficient informal venture capital market is indispensable for a vibrant economy built on active entrepreneurial participation. At the same time, however, there are many signs that the potential inherent in informal investments is not exploited. It is also agreed that initiatives by the public sphere may substantially contribute to the development of a smoothly operating capital market including both the demand and the supply side of the informal venture capital market. 2. International experience shows that state intervention may take three key directions: first of all, it can increase the supply of informal venture capital, on the other hand, it can develop the demand side to offer a sufficient number of promising and attractively compiled project proposals and to increase the number of enterprises able to utilise investments. Last but not least the government may play a role in increasing the efficiency of the market by supporting the establishment and operation of mediating organisations, i.e. business angel networks. 3. Supply-oriented interventions analysed in detail have the broad aim to develop an investment environment, which provides an incentive for direct capital investment by private entities. These interventions include steps to provide this incentive via the tax system and steps to lower investment risk by introducing capital guarantee systems. To increase the supply of capital available for business angel investments measures like advertising programmes, training for potential and active business angels and incentives to organise business angel syndicates can make a contribution. We emphasised the key role of business angel networks in developing, organising and implementing such programmes.

17 4. We have underlined several times that the equity gap does not simply mean a lack of capital, this way the insufficiency of the market cannot be solved only by increasing the supply of investment capital because it does not automatically lead to more investment in growth-oriented small enterprises in their early stages of development. Moreover, lately we have had the chance to experience the effect of a huge amount of capital coming into the market, which in a paradox way contributed to the widening of the financing niche. A research reviewing incentive policies applied in several EU states, in the USA and Singapore found that the most effective way to enliven venture capital markets is to apply intervention on the demand side. Demand for venture capital is defined by the number of well-planned projects based on promising ideas and the ability to receive funding, that is, the ability to absorb capital (which includes positive attitude on behalf of entrepreneurs towards including owner s capital, conditions making the project suitable and ready for investment and finally presentation skills). At the same time, however, we feel that in connection with developing the domestic market it is extremely important to prepare for receiving funding, therefore we presented the five-step model of preparation by Mason and Harrison which has been applied successfully in several cases. 5. It is in vain to have successful initiatives encouraging potential business angels to invest and to increase the number of enterprises actively looking for venture capital and ready to absorb it if the demand and the supply side have difficulty in finding each other: the expected investments will not be realised. Intervention aiming to develop the informal venture capital market must have the indispensable element of improving operational efficiency. This depends largely on the effective operation of business angel networks. In Hungary we can more and more frequently hear statements urging the establishment of effective mediating organisations. In our opinion these networks can be the key institutions of state interventions aiming to develop the informal venture capital market. 6. Finally, on the basis of international experience we make a number of proposals to develop the domestic informal venture capital market. It would be crucial to conduct a comprehensive survey about the state of the informal venture capital market in Hungary and to collect information continuously which would provide a basis for well-founded development decisions. Since in Hungary the term of business angel investors and their activity is rather unknown, to make the practice of venture capital financing well known and accepted it is

18 indispensable to launch an information campaign. Experience clearly shows that only continuous information and dissemination of knowledge can have the desired impact. The policy concerning the development of small enterprises in Hungary has so far not paid attention to the possibilities inherent in informal venture capital investments, and there are no signs that the government would like to embrace the cause of this financing form. If the political decision to stimulate the informal venture capital market is made, beyond direct measures intervention has to take forms which aim to increase the number of promising investment opportunities. In addition, it is necessary to set up an organisation which can fulfil a key role in the effective development of the market. It seems practical to leave development tasks (with the provision of necessary resources) to a business angel networktype of organisation, which could perform training, consulting and representation tasks for both business angels and entrepreneurs in addition to usual mediating services. One of the main functions of this network would be to prepare enterprises to receive funding. F) Future research directions Naturally the results presented in this dissertation do not represent the end of researching the informal venture capital market; much rather it means the beginning: via this paper we have only made a step in the direction of systematically analysing the subject and adapting international results. We believe that there are (at least) three areas where further steps would be fruitful. First, based on the outcome of the small-sample empirical survey introduced in the present dissertation it would be highly important to carry out a comprehensive data collection regarding the supply side of the Hungarian market. Our knowledge of the demand side for informal venture capital is also extremely insufficient; therefore, the second direction to proceed with research would be to collect information among growth-oriented small enterprises in Hungary. Third, it would be rather interesting to acquire a deeper knowledge of the financing and development activities of corporate angels in Hungary since this type of cooperation would be profitable for domestic innovative small enterprises. After collecting the results in all three fields it would be possible to devise a well-founded development concept and a series of measures to make a lasting contribution to the development of the informal venture capital market in Hungary.