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The Influence of Functional and Relational Proximities on Business Angel Investments

PublicationArticle (with peer review)
Alexander Hjertström, Företagandets villkor, Johannes Herrmann, Sofia Avdeitchikova

Abstract

Business angels are a vital source of capital for innovative startup firms. However, even among potentially attractive investment opportunities, most are rejected during the angels investment decision process. Information asymmetry, risk and distrust in the relationship between the investor and the entrepreneur result in investment barriers. The concept of proximity has been proposed as a suitable conceptual foundation to understand how the relationship between angel and entrepreneur might hinder or benefit the investment decision. Particularly, researchers distinguish between functional (geographical) and relational dimensions of proximity. This paper examines the influence of proximity on business angel investments based on data from 226 investment situations gathered in fall 2014 from 56 business angels and 87 entrepreneurs in Sweden and analyzed using Structural Equation Modelling technique. We find that the relationship between geographical proximity and the likelihood of positive investment decision is indeed positive and significant, as indicated in prior research, but that it is fully mediated by relational proximity.

Keywords: Business angels; investment decision; functional proximity; relational proximity; structural equation modeling; mediation.

Related content: Working paper 253

Herrmann, J., Avdeitchikova, S., & Hjertstrom, A. (2016). The Influence of Functional and Relational Proximities on Business Angel Investments. International Journal of Entrepreneurship and Small Business, 29(3), 468-490. DOI: 10.1504/IJESB.2016.079424


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