CLOSING THE REGIONAL EQUITY CAPITAL GAP - THE ROLE OF INFORMAL VENTURE CAPITAL

There is evidence from a number of countries that small firms encounte r a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital in dustry has done little to fill this ''equity gap'' on account of its p reference for making large investments in established companies and ma nagement/leveraged buyouts. Moreover, the supply of venture capital ex hibits a high level of spatial concentration. Initiatives by state/pro vincial and local governments, most notably in economically lagging re gions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costl y, solution. A more appropriate approach to increasing the supply of s tart-up and early stage finance is to facilitate the more efficient op eration of the informal venture capital market. informal investors, or ''business angels'', are private investors who provide risk capital d irectly to new and growing businesses in which they have no family con nection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. Th ere is also considerable scope for expanding the population of busines s angels. The most cost-effective means of closing the equity gap is t herefore for the public sector to underwrite the operating costs of bu siness introduction services whose objective is to overcome the two ma in sources of inefficiency in the informal venture capital market, nam ely the invisibility of business angels and the high search costs of a ngels seeking investment opportunities and entrepreneurs seeking inves tors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.