NEW RESEARCH | What you didn’t know about business angels

We already know that they are important investors for many start-ups. But who are the business angels? A new doctoral dissertation reveals several things about this investment group that we didn’t know before.

Business angels are important for innovation and entrepreneurship, yet we have not yet known everything about them. But now researchers at the Stockholm School of Economics have conducted an in-depth study of recent data from the Swedish Companies Registration Office and the National Archives, among other sources, and have uncovered completely new knowledge about Swedish business angels.

Investing at an early stage

Katarina Warg, one of the researchers, has in her doctoral thesis studied the financing of new companies and innovation, which includes the study of business angels.

– We can see that they contribute as much capital to start-ups as internal investments do. That is, money from the founders, their family or the employees. In this way, business angels are a very important source of external capital, she says.

Business angels typically invest in young start-ups, usually providing funding at an earlier stage of the company’s development than venture capitalists do.

– They invest in different types of companies than venture capitalists do, says Katarina Warg, and believes that the two investment groups complement each other.

Successful and wealthy

People who are able to invest private money in other people’s companies are of course well off. But how wealthy are business angels? In her study, Katarina Warg compared the wealth, characteristics and abilities of business angels with the Swedish population as a whole and with other of the wealthiest individuals in Sweden.

– Angels are at the top end of the wealthiest people. And compared to the other groups, a larger proportion are university graduates.

Happy to take risks

The study also shows that it is common for business angels to have worked in the financial industry and to have management experience.

– Many business angels also have experience with start-ups. Compared to the general population and other wealthy people, angels have made more successful exits,” says Katarina Warg, who has also studied the investment portfolios of business angels.

– They generally take more risks in their investment portfolios, indicating that they have greater risk appetite than other groups.

High IQ and other abilities

Katarina Warg was interested in investigating the cognitive and non-cognitive abilities of business angels, to see if they differ from the population as a whole and from the group of other wealthy people at the top. By analyzing register data at the National Archives and the Swedish Recruitment Agency, where the results of the military service are available, she has been able to draw conclusions about the abilities of male business angels.

– We see that business angels have higher IQs than others and even in tests of non-cognitive abilities they stand out compared to the whole population and to others belonging to the wealthy group in Sweden. There is no public register where women’s cognitive and non-cognitive abilities are collected, so unfortunately we do not know if these results are also true for women.

– But when we estimate individuals’ cognitive abilities using educational attainment, the same pattern emerges, and this includes women.

Women often invest with others

Less than one in five business angels are women, and you can see that their investments differ from those of men. Most women prefer to invest with others, often with family members but also with other business angels.

– This makes it difficult for us to know who is actually investing,” says Katarina Warg.

Another group that differs from business angels as a whole are those with a specific type of knowledge, such as biomedical researchers.

– They tend to make much smaller investments and invest mainly in companies that are directly linked to their area of expertise. They fulfill a different function than just providing capital, often they are part of the board,” says Katarina Warg.

Contact Katarina Warg: kwa.fi@cbs.dk

More about the thesis
Katarina Warg recently defended her thesis Essays In Entrepreneurial Finance: Financing New Firms and Innovations at the Stockholm School of Economics, which is available as a PDF. She is currently working at Copenhagen Business School.