The Influence of Functional and Relational Proximities on Business Angel Investments

Business angels are a vital source of capital for innovative startup firms. However, even of those startups that have the potential to fulfill angel investors’ expected return on investment, most are rejected during the angel’s 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. The purpose of this paper is to examine the influence of proximity on business angel investments. We do this based on data from 226 investment situations gathered in fall 2014 from 56 business angels and 87 entrepreneurs in Sweden and analyzed using a state-of-the-art Structural Equation Modelling technique. We find that the investment decision is partially determined by the functional proximity of investor and entrepreneur, when observed in isolation. Our results furthermore support conceptual studies in the field of business angels that have hypothesized a mediating effect of relational proximity in this relationship. Based on the empirical analysis in this study, we find this effect to be fully mediating.