Published 16 December 2013

Business angels, co-investment funds and policy portfolios

The summary is structured according to the report’s four main sections:

I: Introduction, II: A retrospect, previous studies and business angels in the co-investment funds, III: Business angel policy in Europe and IV: A Swedish policy for business angels? – a concluding policy reflection.

I. Introduction

Growth Analysis’ commission

The Swedish Agency for Growth Policy Analysis ​(Growth Analysis) was originally commis­sioned by the government in its 2009 letter of appropriation to evaluate a capital supply intervention with regional co-investment funds within the framework of Sweden’s eight regional structural fund programmes. Reports will be submitted in the form of three interim reports in 2010, 2011 and 2013 and a final report in 2015. The commission states that the evaluation is to act as a basis for learning in preparation for possible future inter­ventions of a similar nature. The emphasis is to be on experiences from international re­search and empirics.

The present report is thus the third interim report and deals primarily with the public sec­tor’s efforts to promote business angels in four European countries (France, Wales, Bel­gium (Flanders) and Denmark.


Section 1 (chapter 1) consists of an introduction with a description of the assignment and the structure of the report. Section II (chapter 2) briefly describes the on-going efforts with regional co-investment funds (the venture capital project) together with a retrospect of previous interim reports on the assignment. The section ends with a very general introduc­tion to the Swedish business angel market and touches briefly upon the venture capital project where the business angels’ participation is described. Section III (chapter 3-9) is the central part of the report and contains an empirical study of business angel policy in four European countries. The concluding section, Section IV (chapter 10), contains both a brief survey of recent years’ policy activities in the area in Sweden and Growth Analysis’ policy reflections where observations from the country study are linked to the venture capital project. The report also has two appendices: a list of people interviewed in the international study and a list of examples of ongoing publicly financed promotional endeavours in Swe­den.

II. A retrospect, previous studies and business angels in the venture capital project

The regional co-investment funds

The present report is Growth Analysis’ third interim report linked to Swedish endeavours with regional co-investment funds. The project, which runs from 2009 until 2014, is a pro­ject within the European Regional Development Fund (ERDF). Twelve[1] regional co-invest­ment funds covering the whole of Sweden have been established. The project is esti­mated to bring approximately 2.4 billion SEK to the market.[2] The funds always invest jointly with private players and on equal terms (pari passu) with them. At least half the amount must come from private venture capital players while the remainder is shared equally between funds from the ERDF and regional public co-financing.

The project is to be market-complementary and revolving. The former means that it must not crowding out existing private investments and the latter that the capital base must not shrink in the long term.

The capital supply initiative will be followed up and evaluated in various ways, partly by Tillväxtverket[3] (by means of on-going evaluation) and partly by Tillväxtanalys (Growth Analysis). The emphasis in Growth Analysis’ commission is on experiences of interna­tional research and empirics. Reports will be submitted in the form of three interim reports and a final report. Two interim reports have been published earlier. The first, Staten och riskkapitalet [The State and Risk Capital], was presented in 2010 and the second, Kompe­tent kapital?[Competent Capital?], in 2011.

The latter report paints a picture of business angels as an important group, particularly in terms of early stages and geographic presence. Unfortunately, this also coincides with an unclear statistical situation. Growth Analysis therefore noted a need for an in-depth interna­tional study where experiences of promotional measures aimed at this group are studied more closely. The present report, Affärsänglar, riskkapitalfonder och policy­portföljer [Business angels, co-investment fundsand policy portfolios] contains such a study.

Business angels in Sweden

Little is known about business angels and their investments. One explanation might be the existence of a large “invisible” market without public registers, another imprecise defini­tions. As regards the latter, it is for example relevant to talk about a narrow and a broad definition. Factors that are considered then include for example the investor’s independ­ence of the company (e.g. whether investments in family members’ companies are to be included or not), expected gains, the size of the investment and the degree of active owner involvement.

In Sweden, much of our knowledge is based on two studies conducted between 2004 and 2006. According to these studies, the business angels’ investment patterns depend on the definition that is used. On the basis of a broad definition, the investments’ volume can be estimated to be between 3.5 and 4 billion SEK, spread over 30,000 investments in unlisted companies. According to the narrow definition, business angels number about one tenth of this figure but account for approximately half the investment volume.

Just like the institutional venture capital, the informal venture capital is concentrated geograph­ically. Between 2002 and 2004, approximately 70 percent was invested in metro­politan regions and a further 25 percent in major regional centres.

The diffuse knowledge situation makes it difficult to assess how the market has developed. An estimate is nonetheless that its size has increased over the past decade.

Business angels in the regional co-investment funds

In the Swedish venture capital project, a total of approximately 2.2 billion SEK has been invested in 207 portfolio companies over the period from 2009 (project start-up) until the second quarter of 2013. Private co-financing amounts to approximately 65 percent, i.e. a “rate increase” of 1.87 of the public funds. In the funds’ reports, the private investors are divided into three categories; organised capital, private companies and private individuals. The last group might be able to be called “business angels” according to a broad definition.

It is clear that the proportion of business angels is considerable at roughly 40 percent of the private, unique, investor group. As regards volume, the business angels invest approxi­mately SEK 20 percent of the private funds. Just over half of the business angels have their home in the same region as the co-investing fund. More than one in four business angels has his/her home outside the region but inside the country. It is also worth noting that there are large variations between the regional funds.

III. Business angel policy in Europe – an empirical study

The international study was made by associate professor Jesper Lindgaard Christensen of the Department of Business and Management at Aalborg University in Denmark on behalf of Growth Analysis.


The survey has the ambition to generate knowledge of the role that business angels (BA)[4] play in the capital market and how well various promotional measures function (or do not function) in this market. An estimate is also made of existing statistical information concern­ing BAs’ investments. The estimate is based on studies of selected European coun­tries that try in different ways to stimulate investment by BAs.

The study is based on a combination of “desktop studies” of existing reports, statistics and evaluations of interventions in the selected countries and personal interviews with key people with in-depth knowledge of policies to increase BAs’ willingness to invest. The countries were selected on the basis of experience of these countries probably being of benefit to other countries. The following countries were selected: Belgium (Flanders), Wales, France and Denmark.[5]

Information and statistics on business angels

Information and evidence about the area are generally sparse. National statistical offices lack information and alternative sources of data are few and often inadequate. In addition to problems in measuring, the lack of clear, common definitions mean that the picture is diffuse and comparisons of data are difficult to make. The quality, comparability and scope/coverage of existing data therefore need to be improved. In the present analysis, the shortcomings in the data mean that there is a limit to how far we can go as regards quanti­tative data. In many cases, the knowledge obtained is based on a combination of scanty statistical facts, information obtained through interviews, existing literature and personal judgement.

Business angels and promotional policy

In many countries, business angels have been seen as a subordinate policy area but there is reason to be aware of their potential. Business angels play an important role in the finan­cial ecosystem since they provide support in companies’ early growth phases. Business angels not only contribute financial capital but also have an important function as mentors for the companies they are financing. There are indications that this importance has not diminished but rather increased in recent years, since the equity gap for growth-oriented companies in their early stages seems to have widened.

In the literature (Lerner, 2010), has argued that the public sector’s efforts to support the venture capital markets have long lead-times. One of the most common causes of such initiatives failing is impatience, inability to see the broader context and trusting all too narrow evaluation indicators. The findings of the present study largely confirm these obser­vations. Countries and regions support BAs’ investments through support for busi­ness angel networks (BAN)[6], tax incentives, investor training programmes, matching events and co-investment schemes.

One topic under debate is whether the state should support the informal venture capital market in order to alleviate informational constraints other “market failures”. Some of the arguments in favour of public intervention can be attributed to the characteristic qualities of BAs’ investments that are said to: (i) have a different cost structure than institutional venture capital, which permits smaller investments; (ii) have a greater geographically spread, which means that they contribute to reduce regional financing gaps, and (iii) in addition to providing money also provide management with practical help.

In addition to these factors, the report’s field work also showed that business angels can be mobilised for several other, complementary, purposes. These broader functions of BAs open up the range of policies that could be pursued in this area.

Policy efforts

The study found great differences in attitude towards promotional measures in the coun­tries studied, from countries with active interventions on a broad front to Denmark, where no explicit policy within the area is currently applied. In most cases, the measures are rela­tively new ones. It should also be remembered that policies to promote BAs are a long-term process that requires continuous work and patience. In the country studies, we have seen that the intensity of policies for stimulating BAs has varied considerably, even over relatively short periods. For example, a decline in the active policy applied in France and almost a discontinuation of the interventions in Denmark, which is an obvious indication that Lerner’s warning not to underestimate the time it takes for policy measures to have any effect has gone unheeded. We have emphasised the importance of continuity of poli­cies in the area since a long-term approach is important for the users and the organisations that conduct the programmes. There are also great differences between the countries as regards where the financing gap actually is. In reality the gap is not something that just is, objectively speaking. It can be influenced by policy measures and acts as a screening mecha­nism and is subject to policy-related considerations.

France’s business angel policies

The individual countries differed and also gave different types of insights. France has had a tradition of public intervention in capital markets and has applied different instruments such as loan guarantees and tax relief for the smallest companies. One lesson learned from the French example is that the government has supported the establishment of a sense of community concerning BANs and has thus facilitated the organisation and professionali­zation of the BA market by expanding the role of the federal organisation FranceAngel (an association that numbers most of France’s business angels among its members). Together with the information from the use of tax schemes, this has meant that the “visible” part of the market is relatively large, which in turn is positive from the point of view of the busi­ness angels’ visibility and to increase awareness of them. It is probable that the former active tax policies, that were advantageous for a broad spectrum of individuals – including some who did not exactly fit the traditional description of business angels – contributed to create a “equity culture”, or at least greater awareness of the business angels’ investments. This may have contributed strongly to maintaining equity investments during the latest setbacks for the framework conditions that influence business angels’ investments.

Flanders’ business angel policies

One of the most important lessons from the Flanders field study is that the continuous of the state has been of the utmost importance. Historically, support for BANs has varied but there has generally been a long period characterised by active policies. The recommenda­tion based on the Flanders experience on a general level is that government should not think in a short-term perspective and should be prepared to implement its interventions all the way. This is particularly obvious as regards support for BANs. Mutual trust between funding organisations and operative organisations is also of the utmost importance for pol­icy creation and a long-term approach to implementation of the schemes. Finally, there is a wide range of instruments available to support companies in the seed segment, which has meant that the financing gap is on relatively large amounts.

Wales’ business angel policies

Wales’ financial ecosystem is characterised overall by a relatively well functioning inter­play between the players in the capital market for seed and start-up and between private players and public policy. In general it is believed that the financial system and related funding mechanisms and policy measures act as a “funding escalator” and that the system works well in that regard. A shift is currently going on in policy circles and Finance Wales[7] from a “softish” to a more commercial view of money. Another general element of importance is trust between the government and intermediaries. The principal players in the Welsh capital market emphasise the advantages of strong linkages between different players such as Finance Wales, Xénos, banks, other organisations in the public sector and other private players. Finally, this study also showed that it is important to take the target group’s adsorption capability into account when drawing up policies.

Denmark’s business angel policies

In Denmark, little importance is attached to business angels as a possible source of finan­cing for small and medium-sized enterprises (SMEs). The Ministry is generally reluctant to take initiatives in this area. One important reason is the negative experience from two major policy initiatives: the PartnerKapital co-financing programme and the support for the Danish Business Angel Network. No formal evaluations have been made of the policies concerning business angels in Denmark. It was clear, however, that one lesson from the country study is that patience and broad evaluation criteria are important since policies for business angels have a number of indirect effects.

Targets for policies

Desktop studies and experiences from field work give a mixed picture as a basis for policy recommendations concerning what specific interventions should be implemented. Positive assessments of co-investment programmes and tax incentives can be found in several cases, while in others such assessments not. It should also be noted that business angel policies focus on very heterogeneous groups and this applies to both business angels, entrepre­neurs and small companies. This means great challenges as regards drawing up policy. It is difficult to reach two (or more) heterogeneous groups with a few instruments and with instruments that are too “broad” or general. Another challenge is to create greater awareness in the target group of the possibilities. Most of the policy creation in question and the knowledge of the policy programmes is limited to the (small) portion of the market that we call the “visible” part. Tax incentives are probably the tool that would also have the greatest impact on the “invisible” part of the market. There is a general need to develop the policy process and targets to also include this “invisible” part of the market.

Interrelated policies

The study indicates that some policy measures are interrelated. The efficiency of one pol­icy may in certain cases be dependent on another policy. This leads us to the question of whether these policies would in fact benefit from being implemented in a sequence since a policy instrument may build on the results of the previous instrument. This important ques­tion was discussed during the interviews and the debate has also begun to attract attention in academic circles and policy circle, even it is still taking place on a very small scale. It is, however, still a fact that policy schemes appear to be being implemented and evaluated in isolation. Interest is nonetheless growing in a policy and evaluation approach that to a greater extent takes into account a portfolio of policies and their mutual dependencies in­stead of only isolated effects.

Implications for evaluation

The study’s findings indicate that it is naturally difficult to evaluate policies for business angels because of the uncertain time perspective wherein the effects appear. The evalua­tions are also hampered by the fact that some of the effects are characterised as indirect and immeasurable. The interdependencies between different types of policy bring with them further complications since other methods of evaluation are needed than the tradi­tional focus on measuring parameters for an individual scheme at a specific point in time.

IV. A Swedish policy for business angels? – a concluding policy reflection

The final chapter begins with a brief overview of Tillväxtverkets (the Swedish Agency for Economic and Regional Growth’s) activities in the area between 1995 and 2013. The remain­der of the chapter contains Growth Analysis’ reflections linked to Sweden’s re­gional co-investment funds (the venture capital project). The starting point for these reflec­tions is pragmatic: Can the prerequisites for an existing scheme be improved? The Swe­dish venture capital project is fully operational and will by all accounts continue over the next structural fund period (2014–2020). Given the existing project, conceivable possibili­ties to improve the prerequisites for its activities by means of complementary policy measures are commented on – if there is such a political ambition.

The reflective discussion has six main sub-headings: Invisibility and evaluations, A long-term approach, The growing importance of angel investments, Tax incentives, Policy port­folio and Conceivable reinforcing policy initiatives.

The first, “Invisibility and evaluations”, takes up, among other things, the visible and the invisible parts of the business angel market. The former is considerably larger but both knowledge and policy measures are focused on the latter. Taken all together, this means that knowledge is limited. The same applies to the occurrence of systematic evaluations, both in the countries studied and, as far as can be ascertained, in Sweden.

The next sub-section, “A long-term approach”, discusses the need for a long-term perspec­tive regarding policy measures. The market needs a long-term perspective and predictabil­ity to be able to work well. There is much to indicate that the venture capital project will continue during the next programme period (2014–2020), which gives added possibili­ties for both a clear market offering and consideration of complementary policy initiatives.

The third sub-section, “The growing importance of angel investments”, points to a decline in the presence of formal venture capital in early growth phases, which leads to a greater relative importance for informal capital. In the on-going venture capital project, business angels constitute more than 40 percent of the private investors but with substantial varia­tions between the funds. The importance of a functioning exit market is also emphasised.

The fourth sub-section, “Tax incentives”, comments on the investor’s deductions intro­duced in Sweden on 1 December 2013. Referring to Prof. Christensen’s country study it is expected to more favour new, potential angels’ entry into the market than the activities of established, serial, angels. On the other hand, a hard to grasp regulatory framework may reduce the degree of utilisation. Growth Analysis’ opinion is that it is important that the investor’s deduction be evaluated as regards both effects and transparency and adsorption capability on the part of the intended target group. A fundamental prerequisite for this to be implemented is that data on investors and investment objects are able to be made fully accessible to future evaluators.

The fifth sub-section, “Policy portfolio”, begins by linking back to Prof. Christensen’s argument in the country study concerning the need to take policy measures into account as components in a cohesive system (the policy portfolio). The implication is both the recipro­city between different interventions and the importance of the order in which they are implemented. An individual measure may also lead to external effects that can influ­ence the effects of another measure, even if the former viewed in isolation does not show any direct effects. In comparison with the pre-2009 period, the contents of Sweden’s policy portfolio have changed, which – following Prof. Christensen’s line of reasoning – has also impacted on the prerequisites for the policy tools.

The final sub-section, “Conceivable reinforcing policy initiatives”, emphasises the im­portance of the policy measures that are implemented following the same line and acting to attain a clearly defined goal – a governmental policy. Possibilities for improvement are judged to exist in this regard. Potential business angels (virgin investors) or entrepreneurs may be hampered by shortcomings as regards knowledge and information. This may lead to a greater need for coordinated policy measures in the investor/investment readiness catego­ries and BAN activities. Exit issues are predicted to grow in importance in the ven­ture capital project and promotional measures might be considered, e.g. stimulate learning between the funds.

Growth Analysis concludes by observing that while a number of policy measures are assur­edly being implemented in the area, it is doubtful where the impression is one of a cohesive policy portfolio.

[1] Originally twelve, but today only eleven after two funds were merged (SEF II and SED III).

[2] Half public funds and half private funds. It is worth noting that the alternative use of the private capital is not known. It is conceivable that some of it would in a contrafactual situation also have been used for venture capital investment.

[3] The Swedish Agency for Economic and Regional Growth

[4] The term business angels and the abbreviation BA are used interchangeably in the report.

[5] Denmark currently has no explicit promotional policy for BAs.

[6] The term business angel network and the abbreviation BAN are used interchangeably in the report.

[7] An organisation that provides commercial financing for growth-oriented SMEs in Wales.

Business angels, co-investment funds and policy portfolios

Serial number
Report 2013:08

Reference number

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