Title: The influence of functional and relational proximity on business angel investments

Authors: Johannes Herrmann; Sofia Avdeitchikova; Alexander Hjertström

Addresses: Stockholm School of Economics, Sveavägen 65, 113 83 Stockholm, Sweden ' The Ratio Institute, Sveavägen 59, 103 64 Stockholm, Sweden ' Stockholm School of Economics, Sveavägen 65, 113 83 Stockholm, Sweden

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.

Keywords: business angels; investment decisions; functional proximity; relational proximity; structural equation modelling; SEM; mediation; startups; startup funding; startup finance; Sweden; entrepreneurship.

DOI: 10.1504/IJESB.2016.079424

International Journal of Entrepreneurship and Small Business, 2016 Vol.29 No.3, pp.468 - 490

Received: 15 Jul 2015
Accepted: 07 Dec 2015
Published online: 28 Sep 2016 *

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