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The influence of functional and relational proximity on business angel investments

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  • Johannes Herrmann
  • Sofia Avdeitchikova
  • Alexander Hjertström

Abstract

Business angels are a vital source of capital for innovative start-up firms. However, many potentially attractive investment opportunities are rejected during the angel's decision-making 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 conceptual foundation to understand how the relationship between angel and entrepreneur hinders or benefits the investment decision. Specifically, researchers distinguish between the functional (geographic) and relational dimensions of proximity. This paper uses structural equation modelling to examine the influence of proximity on angel investments based on data from 226 investment situations gathered in fall 2014 from 56 business angels and 87 entrepreneurs in Sweden. We find that the relationship between geographic proximity and the likelihood of a positive investment decision is indeed positive and significant, supporting prior research; however, it is fully mediated by relational proximity.

Suggested Citation

  • Johannes Herrmann & Sofia Avdeitchikova & Alexander Hjertström, 2016. "The influence of functional and relational proximity on business angel investments," International Journal of Entrepreneurship and Small Business, Inderscience Enterprises Ltd, vol. 29(3), pages 468-490.
  • Handle: RePEc:ids:ijesbu:v:29:y:2016:i:3:p:468-490
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    Cited by:

    1. Manuel Munoz-Herrera & Ernesto Reuben, 2019. "Business culture: The role of personal and impersonal business relationships on market efficiency," Working Papers 20190027, New York University Abu Dhabi, Department of Social Science, revised Jun 2019.

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