Funding for startups has never been more bountiful, and while it is perhaps too early to gauge whether this deluge of finance will reduce the traditionally high failure rate among startups (and potentially lead to an army of zombie firms kept afloat when they should ordinarily fold), the risk must surely remain that much of this investment will be lost.

With much of this new funding coming from business angels, it’s interesting to read new research from the University of Bath, which explores who business angels are and why they become them.  The researchers assessed over 1.2 million individuals across 92 countries and 14 years, with the data compiled via the Global Entrepreneurship Monitor (GEM), which is the largest dataset on entrepreneurship in the world.  The researchers explored why people became angel investors.

Becoming an angel

While angel investors obviously bring much-needed finance, they also bring a lot of knowledge, experience, and contacts to any new venture.  As such, their motivation is often different from that of other providers of finance, with intrinsic factors more to the fore and a strong desire to build new businesses what drives them.

There appears to be a strong social factor driving people to become angel investors, with people most likely to do so when those similar to them are also doing so or have high levels of entrepreneurial experience.  Such an environment provides a wide range of role models as well as a greater range of networking opportunities for budding angel investors.  This helps them both to identify opportunities and to successfully support any new venture they invest in.

The overall health of the economy was also a factor, with people more likely to become angel investors when the economy was growing.  There were higher rates of angel investing observed in more developed economies, often due to the relative abundance of financial resources.  In these economies, often the biggest challenge is how to channel them in the most productive way.

To encourage angel investing, tax incentives could be used, but with social factors such a big part in whether someone becomes an angel investor, these should be accompanied by initiatives to promote role models and facilitate networking between those with entrepreneurial experience and those with finance they could invest.

While the jury is perhaps still out on just how productive the glut of venture and angel investment into startups has been in recent years, it is nonetheless interesting to better understand who angel investors are and what inspires them to enter this field.