Does investing in technology-based firms involve higher risk? An exploratory study of the performance of technology and non-technology investments by business angels

There is a widespread concern in both the UK and in the European Union that technology-based firms encounter difficulties in raising venture capital at their start-up and early growth stages. This, in turn, reflects the perception amongst investors that investments in technology-based firms involve greater uncertainty (in terms of market and technology) and hence higher risks. This paper explores this contention by means of an examination of the performance of investments made by business angels (informal investors) in technology and non-technology firms. Based on the analysis of deal-specific information, the authors demonstrate that the overall returns profiles of the two types of investments are not significantly different. This may be because business angels are better able than venture capital fund executives to manage the risks involved in investing in technology-based firms on account of their industrial and entrepreneurial backgrounds. Alternatively, it may reflect the fact that the risks involved in investing in technology-based firms have been overstated.